China central bank surprises by lending again at sharply lower rates

SHANGHAI – China’s central bank surprised markets for a second time this week by conducting an unscheduled lending operation on July 25 at steeply lower rates, suggesting the authorities are trying to provide heavier monetary stimulus to prop up the economy.

The medium-term lending facility (MLF) operation comes after the central bank cut several benchmark lending rates on July 22, just days after a top leadership meeting, which had outlined other major reforms.

The People’s Bank of China (PBOC) issued 200 billion yuan (S$37 billion) in one-year loans under its MLF at 2.3 per cent, down 20 basis points from its previous MLF loan, the bank said in a statement.

The MLF rate cut was “basically a reaction to the sharp declines in the stock market”, said ANZ senior China strategist Xing Zhaopeng. China’s benchmark indexes have been falling this week.

China’s stock markets reacted negatively to the news on July 25, taking the sudden urgency on the part of the authorities to lend to mean the deflationary pressures and weakness in consumer demand are more severe than what is priced into assets. China reported weaker-than-expected gross domestic product data earlier in July.

The Hang Seng China Enterprises index in Hong Kong, which tracks Chinese firms listed in Hong Kong, fell 1.6 per cent, taking losses in July alone to 5 per cent.

Mr Marco Sun, chief financial market analyst at MUFG Bank (China), said the cut in the policy rates could reduce the cost of financing and release cash. The unexpected MLF operation was also due to a large amount of MLF loans coming due, he said.

ANZ’s Mr Xing said he expects the central bank to cut the reserve requirement ratio in the fourth quarter to replace outstanding MLF loans.

Some market analysts said the July 25 rate cut was also a reaction to major lenders’ decision to lower deposit rates.

The Industrial and Commercial Bank of China, Agricultural Bank of China, China Construction Bank, Bank of China and Bank of Communications cut deposit rates by 5 basis points to 20 basis points, according to statements on their websites.

“It shows the PBOC wants to be more accommodating to banks in lowering their medium-term funding costs,” said Mr Gary Ng, Asia-Pacific senior economist at Natixis.

“Cutting the MLF rate at a larger scale can help shield the net interest margin.”

The rate cuts also come ahead of a meeting of the Communist Party’s top decision-making body, or Politburo.

“In terms of the challenges facing the Chinese economy, rate cuts by themselves, particularly of this magnitude, are not really going to be that material,” said ANZ’s head of Asia research Khoon Goh.

“I think ultimately, given that the issues facing the property sector, the lack of confidence that is holding back consumer spending and confidence, all these need more concrete fiscal support or other types of policy measures to address. Interest rate cuts by themselves, particularly of the kind of magnitude we are seeing, are not going to really be effective enough.” REUTERS