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SHANGHAI (Reuters) - China's central bank surprised markets for a second time this week by conducting an unscheduled lending operation on Thursday at steeply lower rates, suggesting authorities are trying to provide heavier monetary stimulus to prop up the economy.
The medium-term lending facility (MLF) operation comes after the central bank cut several benchmark lending rates on Monday, just days after a top leadership meeting, which had outlined other major reforms.
The People's Bank of China (PBOC) issued 200 billion yuan ($27.5 billion) in one-year loans under its MLF at 2.30%, down 20 basis points from its previous MLF loan, the bank said in a statement.
The central bank also injected 235.1 billion yuan into markets through seven-day reverse repos at 1.70% and said the cash injection through the short-term instrument was to "maintain reasonably ample month-end banking system liquidity conditions," according to the statement.
The MLF rate cut was "basically a reaction to the sharp declines in the stock market," said Xing Zhaopeng, senior China strategist at ANZ. China's benchmark indexes have been falling this week.
China's stock markets reacted negatively to the news on Thursday, taking the sudden urgency on the part of authorities to lend to mean the deflationary pressures and weakness in consumer demand are more severe than what is priced into assets. China reported weaker-than-expected GDP data earlier this month.
The Hang Seng China Enterprises index in Hong Kong, which tracks Chinese firms listed in Hong Kong, fell 1.6%, taking losses this month alone to 5%. Sovereign bond yields fell after the news of the MLF operation and rate cut.
Marco Sun, chief financial market analyst at MUFG Bank (China), said the cut in the policy rates could reduce the cost of financing and release cash. The unexpected MLF operation was also due to a large amount of MLF loans coming due, he said.
Routine MLF loan operations take place in the middle of each month. The PBOC's operations last week resulted in 3 billion yuan being withdrawn, while leaving the interest rate unchanged.
Total outstanding MLF loans are above 7 trillion yuan, of which 4.68 trillion yuan are set to mature this year. The heavy amount of maturing loans has stirred speculation the PBOC may replace it with a permanent injection of cash via a cut to banks' reserve requirements (RRR).
ANZ's Xing said he expects the central bank to cut RRR in the fourth quarter to replace outstanding MLF loans.
Some market analysts said Thursday's rate cut was also a reaction to major lenders' decision to lower deposit rates.