Fri, Nov 07, 2014 - Page 14 News List

Chinese central bank unveils its latest liquidity tool

Bloomberg

China’s central bank has published details on its latest tool to provide liquidity as it refrains from across-the-board cuts to benchmark interest rates.

The People’s Bank of China confirmed it pumped 769.5 billion yuan (US$126 billion) into the nation’s lenders in the past two months through a newly created medium-term lending facility (MLF).

The central bank injected 500 billion yuan in September and 269.5 billion yuan last month via the facility — all termed at three months with an interest rate of 3.5 percent.

The announcement, included in the bank’s quarterly monetary policy statement, is the first official confirmation of earlier reports of the injections.

Goldman Sachs Group Inc said every 500 billion yuan in funds from the central bank is approximately equal to a 50 basis point cut in the required reserve ratio.

The move “affected mid-term interest rates, while providing liquidity to guide commercial banks to lower their lending rates and overall social-financing costs,” the central bank said in the report published yesterday.

“As liquidity generated from capital inflows eases, MLF has played a role of covering the liquidity gap, and maintaining a neutral and appropriate liquidity situation,” the central bank added.

The facility is the latest unconventional liquidity tool as the Chinese central bank joins the European Central Bank on a path of easing, even as the US begins the shift to a more normal monetary policy.

The expansion builds on targeted steps to support growth in Asia’s largest economy, while stopping short of broad-based monetary loosening and fiscal stimulus, that could raise debt risks and the risk of bad loans.

Last year, the central bank introduced the standing lending facility (SLF), a tool similar to the discount window at the US Federal Reserve and the marginal lending facility at the European Central Bank, to provide short-term liquidity to banks.

The Chinese central bank did not use the SLF in the third quarter, with the outstanding value at zero as at the end of September, it said.

China will continue to implement a “prudent” monetary policy and use various tools to manage liquidity, the PBOC said. The central bank has left reserve requirements for the largest banks and benchmark interest rates unchanged for more than two years.

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