China cbank offers more medium-term loans than expected to cushion economic slowdown

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SHANGHAI – The Chinese central bank injected billions of yuan in the form of medium-term loans into the financial system on Monday, which many market participants interpreted as an effort to support the economy, although the cost of such borrowing has remained unchanged.

The widening of Delta variant epidemics across the country, torrential rains and flooding, and slowing economic growth suggested by recent data have all required additional easing measures to cushion the slowdown, analysts say. .

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The People’s Bank of China (PBOC) kept the rate on a one-year medium-term loan (MLF) worth 600 billion yuan ($ 92.64 billion) to some financial institutions at 2.00. 95% compared to previous operations.

The central bank said the loan operation was aimed at “fully meeting the demand for liquidity from financial institutions” while maintaining “reasonably sufficient” fund conditions.

The move “took into account that financial institutions could use some of the funds released from a reduced reserve requirement ratio (RRR) in July to repay MLF loans due this month,” the PBOC added. .

“The amount of rollover is greater than expected; but the reliance on cash from the earlier RRR reduction to cover the balance is a slight disappointment to the market, as even short-term open market (OMO) operations are not being used, ”said Frances Cheung, rate strategist at OCBC Bank.

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“Going forward, the PBOC may choose to continue to let banks pass lower financing costs on to their customers rather than cut interest rates outright. four months, more in November and December.

Several bond traders also said the MLF loan injection amount was larger than they expected.

A total of 3.05 trillion yuan in MLF loans is expected to expire in the fourth quarter of this year, according to Reuters calculations based on official data.

In the same statement online, the central bank said Monday’s deal was a 700 billion yuan refinancing of MLF loans maturing on Tuesday.

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The PBOC carried out a surprise cut in banks’ RRR in July while highlighting political stability in its second quarter monetary policy report, dampening market expectations for more aggressive monetary easing, including rate cuts. ‘interest.

“As long as the prudent stance of monetary policy remains unchanged, the MLF rate will not be easily adjusted,” said Wang Yifeng, senior analyst at Everbright Securities, adding that a reduced MLF cost could encourage financial institutions to fund investments. leveraged positions.

“We don’t think policymakers already want a significant easing of the overall macroeconomic policy stance. But we expect policymakers to be keen to avoid a sharp slowdown and be more willing to take action to support growth in H2 than in H1, ”said Louis Kuijs, Head of Asia Economics at Oxford Economics .

China is expected to release its August fixing of the benchmark lending rate (LPR) in August, which is loosely pegged to the MLF rate. ($ 1 = 6.4768 Chinese yuan) (Reporting by Winni Zhou and Andrew Galbraith; Editing by Stephen Coates)