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PBOC to Continue With Liquidity Help as Yi Stays On as Governor

(Bloomberg) -- The People’s Bank of China is expected to extend monetary support this week and maintain a key policy rate, after Beijing retained its governor in a leadership reshuffle that signals policy continuity.

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The central bank will probably provide 350 billion yuan ($50 billion) to financial institutions through a medium-term lending facility on Wednesday, as 200 billion yuan of the one-year policy loans mature, according to the median estimate of seven analysts surveyed. The net expected increase in liquidity would be less than the 199 billion yuan last month.

The PBOC’s decision will follow Yi Gang’s reappointment as the central bank governor by China’s parliament on Sunday along with several other top economic officials including the finance minister. The surprise lineup indicates authorities’ intention to maintain policy consistency in a bid to boost investor confidence and engineer a post-Covid recovery.

READ: China Retains Yi as Central Bank Governor in Surprise Move (2)

Market expectations for significant stimulus from Beijing had dimmed after Chinese leaders unveiled a consensus-lagging growth goal of around 5% for 2023. While analysts were earlier in the year predicting rate cuts, some have dialed back their calls after China made clear its aim to rely more on consumers to drive the economy, rather than through debt-fueled spending.

“The policy signals from the PBOC and the National People’s Congress meeting point to a reduced likelihood of MLF rate cuts this year,” said Tommy Wu, senior economist at Commerzbank AG. “The prospect of higher Fed terminal rate also acts as a constraint as widening interest rate differentials could trigger capital outflows and further yuan weakness.”

The PBOC is expected to keep the MLF interest rate unchanged at 2.75%. It was last cut in August.

Recent data paint a mixed picture for the world’s second-largest economy. While manufacturing and services activity beat expectations last month, exports and imports suffered a continued slump. Meantime, consumer and producer prices remained subdued.

For some analysts, the uneven post-Covid recovery may prompt the authorities to eventually resort to more policy easing, either by lowering the MLF rate or banks’ reserve requirements.

“We maintain our expectation of an LPR/MLF rate cut this year, but the timing is not likely to be so soon after the NPC,” said Chang Wei Liang, macro strategist at DBS Bank Ltd. “Monetary policy support should continue, but there is also increased cognizance of risks related to local government debt burdens.”

Here are the key Asian economic data due this week:

  • Monday, March 13: Malaysia industrial output, India CPI

  • Tuesday, March 14: Australia’s NAB Business confidence; Philippines trade data

  • Wednesday, March 15: China one-year MLF, retail sales, industrial production and fixed asset ex-rural, South Korea jobless, New Zealand current account, India trade data, Indonesia trade data, Sri Lanka 4Q GDP

  • Thursday, March 16: Bank Indonesia policy decision, New Zealand 4Q GDP, Australia jobless, Japan trade data and industrial output

  • Friday, March 17: Malaysia trade data

--With assistance from Yujing Liu, Wenjin Lv and Fran Wang.

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