HONG KONG • China caught traders off guard with a surprise injection into the financial system via loans to banks, ahead of data tomorrow that is expected to show a further slowdown in the domestic economy.

The People's Bank of China added 200 billion yuan (S$39 billion) of one-year cash through the medium-term lending facility yesterday, but it kept the interest rate steady.

The move took traders by surprise as the authorities usually inject liquidity when previously offered loans come due, and the next batch will not mature until Nov 5.

The Chinese economy has been under pressure amid a prolonged trade dispute with the United States and a slowing domestic economy, prompting the central bank to ease monetary policy by lowering corporate borrowing costs and cutting banks' reserve ratios this year.

Data out this week showed China's factory deflation deepened and imports and exports fell last month.

"It's not expected by the market," said Ms Becky Liu, head of China macro strategy at Standard Chartered, referring to the cash injection. "They probably want to inject more long-term liquidity" to ensure ample supply during the tax payment season in mid-October and to support the economy, which is still facing growth pressure, she added.

According to Ms Frances Cheung, head of Asia macro strategy at Westpac Banking Corporation, "market reaction is muted, however, probably as the rate is kept unchanged" while other central banks are cutting interest rates.

The yield on China's 10-year government bonds fell 1 basis point to 3.16 per cent as of 10.34am in Shanghai.

BLOOMBERG