China boosts liquidity with medium-term policy tool

With 400 billion yuan worth of MLF loans set to expire this month

SHANGHAI/SINGAPORE (Reuters) - China's central bank rolled over maturing medium-term policy loans while keeping the interest rate on them unchanged on Friday, boosting liquidity after a similar move the previous day.

Market participants believe that a weakening Chinese yuan has constrained the central bank's efforts to aggressively lower interest rates after two reductions to the medium-term policy rate since June. Authorities may instead ramp up liquidity to support the economic recovery.

The People's Bank of China (PBOC) said it was keeping the rate on 591 billion yuan ($81.2 billion) worth of one-year medium-term lending facility (MLF) loans to some financial institutions unchanged at 2.50% from the previous operation.

Friday's decision was intended to keep "banking system liquidity reasonably ample" and quarter-end cash conditions stable, the PBOC said in an online statement.

All 33 market watchers polled by Reuters this week predicted no change to the MLF rate.

On Thursday, the PBOC took a similar step to boost liquidity in the financial system, announcing that it would cut the amount of cash that banks must hold as reserves, after lowering key policy rates last month to aid the economic recovery.

With 400 billion yuan worth of MLF loans set to expire this month, the operation resulted in a net 191 billion yuan of fresh fund injections into the banking system.

"The PBOC's decision on Thursday to cut reserve requirement ratio (RRR) has effectively ruled out an interest rate reduction to the MLF rate," said Ken Cheung, chief Asian FX strategist at Mizuho Bank.

"But the higher MLF injection suggested that the easy monetary policy stance is in line with the RRR cut."

Cheung added that using liquidity instruments could ease strong interest rate cut expectations in the short term to reduce the impact on the yuan.

"The purpose of the PBOC's move was to replenish market liquidity," said Marco Sun, chief financial market analyst at MUFG Bank (China).

"The monetary policy will become more accommodative towards the year-end to accelerate the economic recovery," Sun said, expecting the central bank to lower the MLF rate by another 20 basis points this year.

China remains an outlier among global central banks having loosened monetary policy to shore up a stalling recovery.

However, authorities may be reluctant to cut rates further, worried that a widening yield gap with the United States would put more pressure on the yuan and risk outflows.

The yuan has lost more than 5% to the dollar so far this year to become one of the worst performing Asian currencies. Rapid declines have prompted authorities to ramp up efforts to stabilise the currency. The central bank also injected 105 billion yuan through seven-day reverse repos while keeping borrowing cost unchanged at 1.90%, it said in an online statement. It lent another 34 billion yuan via 14-day reverse repos at 1.95%, down from 2.15% previously. The rate reduction was a follow-up move to the rate cut to the seven-day tenor last month.