PBOC pumps in more liquidity to shore up economic growth

[BEIJING] China's central bank stepped up support for its slowing economy by pumping in cash via policy loans for a second straight month. The benchmark stock index advanced, outperforming regional equities.

The People's Bank of China (PBOC) injected a net 100 billion yuan (S$21.2 billion) into the banking system with its medium-term lending facility, while leaving the borrowing rate unchanged. The CSI 300 rose as much as 0.9 per cent.

Chinese banks in January extended a record amount of loans after the PBOC lowered borrowing costs for the first time since 2020 last month. The latest move, seen as a prelude by many to further easing, comes as the economy struggles with repeated Covid outbreaks, a slowdown in the property sector and signs of weak domestic demand.

"This sends the signal from the PBOC that it's still willing to keep liquidity conditions quite ample and market rates at relatively low level to support credit demand," said Xiaojia Zhi, an economist at Credit Agricole CIB in Hong Kong. "There is room for further policy actions in 1H, including both RRR and policy rate cuts, as growth pressures remain, especially in the property sector and related to private consumption demand."

Sixteen of the 27 economists polled by Bloomberg saw the central bank keeping the interest rate on its 1-year policy loans unchanged, with most saying the PBOC can afford to wait and see whether earlier easing measures are taking effect.

In January, the central bank cut the rate on its 1-year policy loans by 10 basis points to 2.85 per cent, the first reduction since April 2020.

Still, there's a growing chorus of economists and investors calling for more support, with Citic Securities saying that a cut in the reserve requirement ratio for banks could be seen as early as March. In its quarterly report last week, the PBOC pledged to keep its monetary action "ample, targeted and front-loaded".

Despite the decision to hold the 1-year policy loan rate steady Tuesday (Feb 15), the PBOC's easing stance has set it apart from other major central banks including the Federal Reserve, which are tightening monetary policy to tame soaring inflation. The possibility that the Fed will accelerate the pace of rate hikes could restrict China's room for further easing later this year as it could accelerate outflows.

Global demand for Chinese bonds has already slipped amid their shrinking yield premium. The yield gap on China's 10-year sovereign bonds over similar-maturity Treasuries narrowed to 73 basis points last week, the least since 2019.

"Added liquidity in MLF with the rate unchanged is consistent with the easing signal released by the PBOC in its quarterly monetary policy report," said Bruce Pang, head of macro and strategy research at China Renaissance Securities Hong Kong. "It's still possible for the PBOC to cut interest rates and the RRR, but it may need some time before that to evaluate the effect of its previous actions." BLOOMBERG