China keeps rate unchanged, balancing economic risks

The People's Bank of China (PBOC) on Tuesday extended the maturity of medium-term loans and also kept their interest rate unchanged. The interest rate has remained the same for three months. Probably, officials suggested that the yuan could weaken further with a looser monetary policy.

Beijing is also trapped by widespread interest rate hikes, and China has lost the ability to support its own economy. And the constantly falling yuan doesn’t facilitate the inflow of capital, on the contrary, it rather provokes an outflow.

The rate on medium-term loans with a term of 1 year will remain the same, that is, equal to 2.75%. Currently, the amount of all medium-term loans is 850 billion yuan ($120.21 billion).

Wang Qing, macro analyst at Dongfang Jincheng, noted that the issue of market stabilization remains the priority for macroeconomics. He stressed that keeping interest rates unchanged is designed to stop the ever-increasing difference between American and Chinese interest rates. It’s also necessary to stabilize expectations in the foreign exchange market. 

China had a certain number of medium-term loans worth 1 trillion yuan, the maturity of which expired on the same day. Thanks to them, the net outflow of funds amounted to about 150 billion yuan. According to PBOC's statements, such an operation was necessary to withstand the high demand for cash and maintain sufficient liquidity in the banking system.

PBOC offered 320 billion yuan of medium- and long-term liquidity through pledged supplementary lending and relending facilities. PBOC will start to operate in this way from November.

Moreover, PBOC stressed that the amount of medium- and long-term liquidity injection is already much higher than the amount of repayment of medium-term loans for the current month. PBOC managed to keep the cost of borrowing at the same level of 2%, even while investing 172 billion yuan in 7-day reverse repos.

Senior strategist for China at ANZ, Xing Zhaopeng noted that for now, monetary policy changes will mainly be based on credit demand data, which declined significantly in October. He also stressed that the interest rate cut isn’t expected, although the NCB will continue to maintain sufficient liquidity.