Yahoo Finance China Leaves Key Rate Unchanged on Currency Pressure, Liquidity
(Bloomberg) -- China’s central bank left a key interest rate steady for the tenth straight month, displaying caution on monetary easing given abundant liquidity and the pressure to prevent the yuan from weakening further.
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The People’s Bank of China kept the rate on one-year policy loans, the so-called medium-term lending facility, steady at 2.5% on Monday, in line with the forecast in a Bloomberg survey. It withdrew a net 55 billion yuan ($7.6 billion) from the banking system to avoid excessive liquidity.
The decision reflects financial authorities’ preference for currency stability over lower borrowing costs, despite a fragile recovery in the world’s second-largest economy. Beijing’s restraint may dampen market hopes for monetary easing that have kept local bond yields near a two-decade low.
“A rate cut would be beneficial to support the economy at this juncture” given weak credit data released last Friday, said Lynn Song, greater China chief economist at ING Bank. “It is likely that the PBOC has held off from rate cuts to date in consideration of the top level policy priority to maintain currency stability at a reasonable and balanced level.”
Authorities have refrained from outright rate cuts, with an eye toward keeping the yuan a “powerful currency,” even as voices calling for a cut grow louder. Last week, the onshore yuan slipped to the weakest level since November, weighed down by a wide US-China rate gap.
Sufficient market liquidity also keeps authorities on the sidelines, reflected in cheaper borrowing costs of a popular debt instrument. The rate on one-year AAA-rated negotiable certificates of deposits dropped to around 2%, compared with the MLF’s 2.5%. The inflows from savings to wealth management products and other higher-yielding assets pumped in cash into the financial system.
The liquidity drainage underscores the lack of demand for the more expensive MLF loans, according to Becky Liu, head of China macro strategy at Standard Chartered Bank. “The MLF withdrawal without a rate cut is expected, given much lower funding costs in the market compared with borrowing from PBOC via MLF.”
The PBOC will have to take banks’ net interest margins, which have been narrowing, as well as the yuan’s exchange rates, into consideration before cutting rates, according to two separate reports by state media Monday.
China’s economy has undergone a patchy recovery. A slew of official data released on Monday showed industrial expansion slowed in May, while retail spending beat estimates.
Despite accelerated government bond sales to boost infrastructure spending, the years-long property slump continues unabated. The country’s home prices slipped at a faster pace in May, according to the latest official data released on Monday.
Exports climbed more than expected in May while inflation rose less than expected. But factory activity surprisingly contracted last month, according to an official survey.
The Chinese yuan steadied in both onshore and offshore markets after the MLF decision and economic data release. Yield on the benchmark 10-year government bond was little changed at 2.26%.
Economists forecast 4.9% growth for this year, according to the latest result from a survey by Bloomberg. That would be roughly in line with the nation’s target of around 5%, a goal that China watchers say would require more stimulus.
--With assistance from Qizi Sun and Yujing Liu.
(Updates with latest economic data in ninth, tenth paragraphs.)
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