China Seen Rolling Over Policy Loans to Keep Liquidity Abundant

(Bloomberg) -- China's central bank is expected to extend key policy loans maturing Friday, signaling an intention to maintain liquidity in the banking system as it tackles the challenges from a slowing economy and rising financial risk.

The People's Bank of China will roll over all 500 billion yuan ($66.9 billion) of its medium-term lending facility coming due, according to five out of eight analysts polled by Bloomberg News. The other three surveyed expect at least 400 billion yuan of the one-year loans to be extended.

The PBOC's decision is a focus of attention after it surprised markets last Friday by unexpectedly withdrawing short-term liquidity following a week-long holiday, a move that triggered a selloff in Chinese bonds. It also will indicate Beijing's latest policy stance as conflicting signals from the economy, from weak consumption to robust exports and rising price pressures, continue to fuel a debate over the need for further monetary easing. 

An economic slowdown and the property sector's indebtedness are among key challenges for the PBOC, said Winson Phoon, head of fixed income research at Maybank Kim Eng Securities. “These make ensuring monetary policy stability and predictability without drastic changes even more important.”

The PBOC's imminent liquidity test comes at a time when economists appear divided over the chances or timing of a fresh move to unleash more funds into the economy by cutting banks' reserve requirement ratio. 

While Citigroup Inc. and Australia & New Zealand Banking Group Ltd. expect the central bank to further reduce the amount for lenders to park there as reserves later this month, Nomura Holdings Inc. is among those that think the PBOC is less likely to cave in to easing pressure just yet.

“The PBOC will likely maintain ample liquidity that ensures access to funding but not excess liquidity and cheap funding that inappropriately encourages leverage and inefficient allocation of capital,” Phoon said. 

PBOC Governor Yi Gang told the Group of 20 central bankers' meeting held Wednesday that China's prudent monetary policy will be “flexible, targeted, reasonable and appropriate” so as to support high-quality economic development. He added that the country's inflation is “moderate” overall. 

The interest rate on the one-year lending tool that financial institutions pays the central bank will stay unchanged at 2.95%, according to all the analysts polled by Bloomberg News. 

The PBOC fully rolled over the 600 billion yuan MLF due last month, after draining 100 billion yuan when such loans matured in August. The central bank explained its August shortfall by saying the funds released from July's reserve requirement reduction could help lenders repay the loans. 

©2021 Bloomberg L.P.

With assistance from Bloomberg

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