China to partially roll over medium-term contract loans, keeping rates stable

SHANGHAI (Reuters) – China’s central bank is expected to partially roll over maturing medium-term borrowings on Monday, while keeping borrowing costs unchanged for the seventh consecutive month, a Reuters survey showed.

Rising domestic inflationary pressure has further limited policy space to support the economy slowly recovering from the shocks of COVID-19, at a time when other major economies are aggressively raising interest rates.

In a poll this week of 32 market watchers, all respondents expect no change in the interest rate on the one-year medium-term loan facility (MLF), which stands at 2.85% .

Instead of worrying about borrowing costs, markets are worried about whether the People’s Bank of China (PBOC) will fully roll over the 600 billion yuan ($89.04 billion) of those loans maturing on Monday. .

Twenty-nine of the survey participants, or 90.6%, said they expected a partial renewal, while the other three expected the central bank to fully extend maturing loans.

Traders and analysts said the banking system was already awash with liquidity, with interbank money rates hovering at two-year lows and consistently below policy rates, so there was little need for the central bank to inject money. funds.

“Given the abundant liquidity in the market, a rollover amount of 400 billion yuan or more will be considered favorable,” said Frances Cheung, rates strategist at OCBC Bank in Singapore, noting that the MLF maturity is heavy this month.

Ming Ming, chief economist at CITIC Securities, said these cheap funding costs also encourage bond market participants to accumulate leverage.

“Along with the risks of a rebound in structural inflation, the central bank should steer market costs higher and close to policy rates and could lead to a partial renewal of the MLF in August,” Ming said.

The PBOC reiterated that it would intensify the implementation of its prudent monetary policy and maintain reasonably adequate liquidity, while closely monitoring changes in domestic and external inflation, it said in its report on the monetary policy in the second quarter.

“There is still little room for reserve requirement ratio (RRR) cuts in the fourth quarter as one-year MLF maturities rise, but with ample liquidity weighing on interbank market rates, the PBOC could also reduce the longer-term cash injection,” Liu Peiqian said. , chief economist for China at NatWest.

Liu said she has revised her view and does not expect any further benchmark rate cuts this year.

The MLF rate now serves as a guide for the lending benchmark, the Lending Prime Rate (LPR), which is due to be released on August 22.

($1 = 6.7382 Chinese Yuan)

(Reporting by Steven Bian and Brenda Goh, Writing by Winni Zhou; Editing by Robert Birsel)

Copyright 2022 Thomson Reuters.

James V. Hayes