The 30-basis-point cut was the biggest since the bank began using the monetary tool to guide market interest rates in 2016.
(Sept 25): China’s central bank lowered the interest rate charged on its one-year policy loans by the most on record, kicking off a sweeping programme to revive confidence in the world’s second-largest economy.
The People’s Bank of China (PBOC) cut the rate of the medium-term lending facility (MLF) to 2% from 2.3%, according to a statement on Wednesday. The 30-basis-point cut was the biggest since the bank began using the monetary tool to guide market interest rates in 2016.
The expected move followed governor Pan Gongsheng’s announcement the previous day of a broad stimulus package that amounted to an adrenaline shot for an economy on the cusp of a deflationary spiral.
“The cut is part of the package,” said Bruce Pang, the chief economist for Greater China at Jones Lang LaSalle Inc. “The market is keeping a close eye on the strength, frequency and synergy of measures to follow as China strives to achieve this year’s around 5% growth goal.”
The yuan rallied past the seven per dollar milestone for the first time in 16 months as investors digested China’s stimulus package. Chinese stocks extended their gains, with the onshore benchmark CSI 300 Index on track to wipe out all of its losses for 2024. The yield on China’s 10-year bonds fell one basis point to 2.05%.
The cut in the MLF rate is a prelude to more significant measures, such as a promised reduction in the rate on seven-day reverse repurchase notes, which the PBOC increasingly favours as the main policy lever. The rate on those instruments will be lowered by 20 basis points to 1.5% “soon”, Pan said on Tuesday.
Reflecting the new framework, the monetary authority withdrew a net 291 billion yuan (US$41.4 billion or RM937.3 billion) via the MLF, the biggest drainage since December 2021.
The outstanding MLF loans are widely expected to be gradually replaced by other tools, including cash injections through reserve requirement ratio (RRR) cuts, as the PBOC seeks to influence market borrowing costs more effectively.
“The MLF may be downgraded to become a tool to adjust the marginal borrowing costs of banks,” said Zhaopeng Xing, a senior strategist at Australia and New Zealand Banking Group. “The MLF rate in the future could change following movements in market rates.”
The central bank chief revealed a plan to unleash one trillion yuan in long-term liquidity with a 50-basis-point reduction in the RRR, which determines the amount of cash lenders must keep in reserve. Along with other new funding tools, the measures more than compensated for the effect of the net withdrawal on market liquidity.
“Looking ahead, there is room for further replacement of MLF liquidity with RRR cut-induced liquidity given heavy MLF maturity in the coming months,” said Frances Cheung, a strategist at Oversea-Chinese Banking Corp (OCBC).
The rate cut on the one-year lending on Wednesday “renders the facility more aligned with funding costs” in the interbank market, she added.
The earliest window for the repo rate cut to take effect could come after the week-long National Day holiday starting from Oct 1. The central bank has opted to provide 14-day reverse repo bills this week ahead of the break.
The PBOC is giving banks more say to influence the MLF’s prices by allowing them to bid the loans by interest rates, breaking away from the past practice of bidding by amount. On Wednesday, the central bank for the first time published the highest and lowest bidding rates for the MLF at 2.3% and 1.9% respectively.
Outstanding MLF declined for a second straight month in September after Wednesday’s operation, standing at the lowest since November 2023.
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