As funding costs surge, China set to pump extra cash into money market
CHINA’S central bank will probably increase the amount of cash it pumps into the money market this week to rein in funding costs.
The People’s Bank of China (PBOC) will offer 450 billion yuan (S$87.8 billion) of one-year medium-term loans to banks in February, 50 per cent more than the amount maturing, according to the median forecast of economists surveyed by Bloomberg ahead of the Feb 15 announcement. That’s after a gauge of overnight borrowing costs climbed to a two-year high last week.
An increase in cash injection would add to evidence that China is continuing to ease monetary conditions to revive an economy handicapped by years of tough Covid restrictions. A rapid rebound in demand and consumption since the curbs were dropped in December had tightened liquidity and left some economists questioning the need for more stimulus.
“It isn’t yet the time for PBOC to scale back liquidity support, given that economic growth haven’t fully stabilised,” said Nie Wen, chief macro analyst at Hwabao Trust, who expects a 500 billion yuan injection this week. He added that cuts in the key rate, or the required reserve ratio, are still possible this year if existing measures to support the economy prove insufficient.
Chinese banks extended a record 4.9 trillion yuan of new loans in January, after authorities prodded them to lend more to businesses, higher than the 4.2 trillion yuan expected by economists.
A net increase in the medium-term lending facility, or MLF, would further replenish long-term funds for banks. That’s after the PBOC ramped up injections via the seven-day reverse repo to more than 1 trillion yuan last week, easing the cash squeeze.
BT in your inbox
Start and end each day with the latest news stories and analyses delivered straight to your inbox.
The PBOC will probably keep the MLF rate at 2.75 per cent, according to the survey.
The seven-day repo rate has risen from a two-year low in August to close to the PBOC’s comparable reverse repo rate, indicating that the glut of liquidity in China’s financial system last year is gone.
The narrowing gap between market and policy rates should be welcomed by the central bank, according to Zhaopeng Xing, a senior strategist at Australia & New Zealand Banking Group. It means banks will rely more heavily on funds from the PBOC, leaving it holding the cards to guide a normalisation of rates, he said.
Pro-growth stance
Despite the recovery in some activity indicators, economists expect the PBOC to maintain a pro-growth stance as home sales continued to slump and questions remain about the sustainability and strength of the consumption rebound. Clouding the outlook are the risk of another Covid wave, and questions over when the Federal Reserve will end its rate hikes.
The PBOC may also launch new re-lending tools to provide cheap funding for banks for loans that support property projects and rental housing, ANZ’s Xing said. The combined use of regular tools and structural ones will ensure “targeted and forceful” monetary policy this year, he said. BLOOMBERG
Share with us your feedback on BT's products and services
