China central bank rolls over more policy loans than expected to boost growth

Beijing

CHINA'S central bank rolled over most of its medium-term policy loans coming due, a move to support economic growth amid a resurgence of Covid cases. Government bonds reversed earlier losses.

The People's Bank of China (PBOC) injected 600 billion yuan (S$125.6 billion) into the financial system through its medium-term lending facility (MLF), close to the 700 billion yuan maturing on Tuesday. About half of 13 analysts surveyed by Bloomberg prior to the operations predicted that the PBOC would reduce the amount of funding to around 500 billion yuan.

China's benchmark 10-year bond yield fell one basis point to 2.88 per cent after being about two basis points higher on the day before the MLF operation. Ten-year bond futures rose 0.1 after key economic data missed estimates.

Expectations are building for the authorities to do more to support growth as fresh virus outbreaks add new risks to a recovery already hit by floods and faltering global demand. The PBOC is facing mounting calls to cut interest rates, though an unexpected acceleration of inflation in July raised concern that price pressures may not be transitory.

"Today's operation is a little bit higher than expected, which can help ease the fear of a liquidity crunch," said Hao Zhou, senior emerging market economist at Commerzbank in Singapore. "We can't rule out the possibility of another reserve requirement ratio cut before year-end to roll over more MLFs coming due, but we don't expect a policy rate cut."

The PBOC kept the MLF rate at 2.95 per cent, while also adding 10 billion yuan via seven-day reverse repurchase agreements in its open-market operations, matching the amount maturing.

Asia's second-biggest government debt market has rallied for the past eight weeks, thanks in part to speculation that the central bank would unleash more easing after cutting the reserve requirement ratio in July. Bond gains slowed after data earlier this month showed factory gate inflation surged to 9 per cent, adding to signs that inflationary pressures are building.

Other areas of China's economy are showing less exuberance. Retail sales expanded 8.5 per cent in July from a year earlier, less than a projected 10.9 per cent increase, government data showed on Monday. Industrial output climbed 6.4 per cent in the period, below the median estimate of 7.9 per cent.

"Weakness was seen across the board," said Zhaopeng Xing, senior China strategist at Australia & New Zealand Banking Group in Shanghai. "Given that the PBOC is prioritising lower financing costs, more easing measures can be expected." BLOOMBERG