China unexpectedly cuts 2 key rates and withdraws money from the banking system

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The headquarters of the People’s Bank of China (PBOC), the central bank, is pictured in Beijing, China September 28, 2018. REUTERS/Jason Lee

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SHANGHAI, Aug 15 (Reuters) – China’s central bank unexpectedly cut a key interest rate for the second time this year and withdrew liquidity from the banking system on Monday, in an attempt to revive credit demand to support economy impacted by COVID.

Economists and analysts said they believe Chinese authorities are keen to support the sluggish economy by allowing a growing policy divergence with other major economies that are aggressively raising interest rates.

The People’s Bank of China (PBOC) announced that it is lowering the rate of 400 billion yuan ($59.33 billion) of one-year medium-term loans (MLF) to certain financial institutions by 10 basis points (bps) to 2.75%, from 2.85%.

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In a poll of 32 market watchers last week, all respondents predicted the MLF rate would remain unchanged and 29 predicted there would be a partial rollover. Read more

“The rate cut surprises us,” said Xing Zhaopeng, senior China strategist at ANZ.

“This should be a response to weak credit data on Friday. The government remains cautious about growth and won’t let up.”

New bank lending in China fell more than expected in July, while overall credit growth slowed, as further COVID surges, job concerns and a deepening housing crisis made businesses and consumers reluctant to take on more debt. Read more

The PBOC attributed its decision to “maintaining reasonably sufficient liquidity in the banking system.” And with 600 billion yuan of MLF loans coming due, the operation resulted in a net withdrawal of funds of 200 billion yuan.

Market participants largely priced in partial refinancing as the banking system was already awash with liquidity, with interbank money rates hovering at two-year lows and consistently below policy rates.

“Now, in hindsight, today’s 10 basis point decline can be seen as an ‘initial load’ before the headroom shrinks going forward as the PBOC sees structural inflationary pressure “said Frances Cheung, rates strategist at OCBC Bank.

The PBOC reiterated that it would intensify the implementation of its prudent monetary policy and maintain reasonably adequate liquidity, while closely monitoring changes in domestic and external inflation, it said in its report on the monetary policy in the second quarter.

“Despite the warning of inflation risk and the state of liquidity, the prevailing downside risks under the spread of COVID and the housing sector rout prompted the PBOC to cut rates to stimulate demand,” said Ken Cheung, Chief Asian Currency Strategist at Mizuho Bank.

Chinese 10-year Treasury bond futures jumped more than 0.7% in early trade after the rate decision, while sovereign bond yields for the same duration fell around 5%. basis points.

The central bank also injected 2 trillion yuan through seven-day reverse repos while cutting the cost of borrowing by the same margin by 10 basis points to 2.0% from 2.1%, according to a press release online.

The PBOC cut both rates by 10 basis points in January.

($1 = 6.7425 Chinese Yuan)

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Reporting by Winni Zhou and Brenda Goh; Editing by Kim Coghill and Neil Fullick

Our standards: The Thomson Reuters Trust Principles.

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