China’s Central Bank (People’s Bank of China, PBOC) is pumping in the biggest chunk of medium-term financial liquidity since 2020. They’re doubling down on their efforts to give the economy a solid boost.
PBOC is treading a fine line, balancing the need for abundant liquidity to support the struggling economy while also aiming to stabilize the yuan amidst expectations of “extended” U.S. interest rates.
Last Tuesday, the International Monetary Fund (IMF) revised down its projections for China’s economic growth in 2023 and 2024 due to a slowdown caused by the real estate crisis. The world’s second-largest economy is now expected to achieve a GDP growth rate of 5 percent in 2023 and 4.2 percent in the following year, as per the IMF’s latest quarterly forecast. These figures represent a 0.2 percent and 0.3 percent decrease, respectively, compared to the July forecasts.
According to the IMF, China’s gross domestic product (GDP) is expected to reach 4.2 percent in 2024, which is 0.3 percent lower than the forecast made in July.
On Monday, PBOC bolstered liquidity support for the banking system through the rotation of medium-term policy loans. However, they maintained the interest rate unchanged due to concerns over the potential risk of significant depreciation in the yuan.
The Bank announced that it has provided 789 billion yuan ($107.96 billion) in medium-term lending facilities to ensure ample liquidity within the banking system, as disclosed in their official statement.
As the Multilateral Fund’s 500 billion yuan loans reach maturity, PBOC is injecting 289 billion yuan of fresh liquidity into the banking system. This marks the largest net injection in almost three years.
Meanwhile, there was no change in the one-year policy loan interest rate, which remained steady at 2.50 percent. This aligns with the expectations of a Reuters poll conducted last week.
According to analysts, the People’s Bank of China aims to inject liquidity into the market as a means to alleviate pressure, as per their perspective.
Issuance of refinancing bonds
This month, a large number of Chinese local governments rushed to issue special refinancing bonds to pay off outstanding liabilities, as Beijing ramps up efforts to reduce the increased debt risk that remains a concern for investors.
Analysts anticipate that the issuance of these bonds will reach a minimum of 1 trillion yuan during the current year.
Furthermore, experts noted that the government’s tax collection in October is expected to exert pressure on liquidity.
Read more: China: A global catalyst no more?
Interest rate cuts
To lower borrowing costs in an economy grappling with weak consumption and a deteriorating real estate crisis, PBOC has implemented two interest rate cuts on the Multilateral Fund, which serves as a reference for China’s benchmark lending rates, throughout this year.
However, Reuters suggests that additional monetary easing measures could potentially widen the yield gap between China and the U.S.. This, in turn, could exert further downward pressure on the yuan, which has already depreciated by approximately 5.5 percent against the dollar this year.
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