A maturity of policy loans in China today is set to offer clues on how far the central bank will go in loosening monetary policy.
A rollover of all 400 billion yuan (US$62 billion) of medium-term lending facilities (MLF) due today, after a surprise reserve requirement ratio cut last week, would signal a significant shift to easing, Australia & New Zealand Banking Group Ltd senior China strategist Xing Zhaopeng (邢兆鵬) said.
That is not expected to happen, with most analysts seeing either a reduction or a withdrawal of the loans.
The surprising dovish turn by the People’s Bank of China (PBOC) last week is raising speculation over the severity of the nation’s economic slowdown, with traders anxiously waiting on the routine monthly liquidity operation that is due just before the latest economic data.
Some in the market, such as UBS Asset Management and Citic Securities Co (中信證券), are forecasting interest rate cuts in the months ahead.
“Despite what’s being touted by the central bank on keeping liquidity stable, this is a window into the PBOC’s real stance,” said Zhang Chuanxu, a fund manager at Hexi Capital (和熙資本) in Shanghai.
China has not lowered its interest rate on one-year MLF since reducing it to 2.95 percent in April last year, and it has largely rolled over maturing MLF so far this year.
Replacing some of the maturing MLF with cash from the reserve ratio cut would lower funding costs for banks as the latter carries no interest rate.
Xing expects 100 billion yuan of the facilities to be rolled over.
“The current economic slowdown is mainly caused by supply-side constraints, not the demand side, so 2.95 percent for the MLF rate remains the equilibrium level,” Xing said.
About 10 billion yuan of seven-day reverse repurchase contracts are also due today, when the nation is set to report second-quarter GDP data.
Economists expect the headline growth rate to slow to 8 percent from the record 18.3 percent expansion seen in the first three months of this year.
The medium-term facilities due today are the first in a wall of maturing loans through December that total about 4.15 trillion yuan.
That is more than three times the 1.3 trillion yuan that was due in the first half of the year, which could provide the central bank ample opportunities to adjust liquidity levels should it choose to do so.
Most analysts expect policymakers to be wary of adding excessive cash to avoid fueling market volatility.
Chinese government bonds have rallied since last week, with traders adding leverage to buy the notes.
The yield on the most actively traded 10-year sovereign bond fell to the lowest in a year on Tuesday.
“What Beijing doesn’t want to see is a spike in cash supply, which could lead to a quick drop in interest rates,” Nomura Holdings Inc chief China economist Lu Ting (陸挺) said. “That could hurt market stability and prompt a buildup in financial leverage, which doesn’t benefit the economy that much.”
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