China Pumps In More Liquidity While Keeping Key Rate on Hold

(Bloomberg) — China’s central bank is providing more liquidity into the financial system while keeping a lending rate unchanged, as it moves to prevent funding squeezes stemming from rebounding credit demand.

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The People’s Bank of China offered 170 billion yuan ($25 billion) of funds to banks through the medium-term lending facility. That resulted in a 20 billion yuan net injection in April, the smallest since November. It also left the interest rate unchanged at 2.75%, the eighth month for it to stand pat, as expected by a majority of economists and analysts in a Bloomberg survey.

The smaller liquidity provision indicates the PBOC is evaluating the impact of its March easing, when it had both cut a banking reserve ratio and provided more cash to support growth. Data last month indicated that an economic recovery is taking off, with credit expansion surging and exports beating estimates.

“The outcome is in line with expectation for a small upsize. While we have long penciled in a potential small rate cut this year, a cut does not seem to be imminent,” said Frances Cheung, rates strategist at Oversea-Chinese Banking Corp. in Singapore.

China’s economy is rebounding, and the growth target of around 5% this year could be achieved as the property market improves, PBOC Governor Yi Gang said during a Group of 20 meeting last week.

The net injection via MLF in April marked the fifth month in a row for the central bank to take such action. The PBOC also cut the required reserve ratio for lenders in March, and that may have unleashed about 500 billion yuan of long-term funds into the financial system. China’s efforts to ensure there’s enough liquidity in markets may help stabilize borrowing costs, which is under pressure to rise as a recovering economy boosts demand to raise funds.

China’s 10-year government bond yield edged up 1 basis point to 2.84% on Monday, paring last week’s decline fueled by speculation for a rate cut. The offshore yuan slipped 0.1% to 6.8796 per dollar.

Banks Cut Rates

Even as the PBOC keeps the policy rate steady, some smaller Chinese lenders have cut deposit rates in April, moves that could improve their profitability and encourage more borrowing. China’s interest rate self-disciplinary mechanism, a regulatory body overseen by the PBOC, has adjusted the assessment method for banks this year in a move to urge lenders to lower deposit rate, the 21st Century Business Herald reported.

The central bank in a statement posted Friday on its first-quarter monetary policy meeting said that the economy was recovering and refrained from repeating the line from the previous conference that there were “three pressures” of contracting demand, supply shocks and weakening expectations.

It also omitted the phrasing of counter-cyclical adjustment, in what some analysts including Huachuang Securities Co.’s Zhou Guannan regarded as a signal of narrowing chances for further loosening. Immediate tightening is unlikely as well as the PBOC said the foundation of economic recovery is “not solid yet,” adding that credit growth will be kept “reasonable.”

–With assistance from Chester Yung and Fran Wang.

(Adds chart and analyst quote.)

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