PBOC Keeps Medium-term Policy Rate Unchanged in July, Analysts Point to Slight Excess Liquidity

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The Chinese central bank has kept medium-term interest rates steady in July via open market operations.

On 15 July PBOC undertook 100 billion yuan in medium-term lending facility (MLF) operations and 3 billion yuan in reverse repo operations, for the purposes of “maintaining rationally ample liquidity in the banking system.”

The MLF rate for the month was 2.85%, holding steady with the reading for June.

Given that a total of 100 billion yuan in MLF mature in July, PBOC’s latest round of open market operations keeps the outstanding amount steady, for the fourth consecutive month that the central bank has held it even.

Zou Lan (邹澜), the head of PBOC’s monetary policy department, said that the 7-day weighted average repo rate (DR007) on the interbank market is currently around 1.6%, lower than the open market operations rate, and serving as an indication that liquidity is rationally ample or tending slightly towards excess.

“Even though market liquidity has tended towards excess of late, PBOC’s continued offsetting of maturing MLF at the same levels sends the signal that banking system liquidity will be kept at rationally ample levels, and that it will guide the banking system to expand the intensity of support for the real economy,” said Zhou Maohua (周茂华), macro-researcher with Everbright Bank.

“At the same time it will also avoid excessively ample liquidity, and it is expected that PBOC’s subsequent open market operations will continue to focus on interbank interest rate levels.”

In June the DR007 stood at 1.72%, for a rise of around 9 basis points compared to May, yet still markedly below the central bank policy rate of 2.10% for 7-day repos.

Wang Qing (王青), chief macro-analyst with Golden Credit Rating, said that the decline in the DR007 since the start of July is an indication that market liquidity is slightly above rationally ample levels, and that given that issuance of special bonds is “basically complete”, there is no need for further increases in MLF volumes.

Wang also said that the unchanged MLF rate for July is in line with market expectations.

“At present various growth stabilisation policies are currently in the implementation phase, and the momentum of economic recovery is already established,” Wang said. “Overall, monetary policy is at the observation stage.”

Mao Zhaohua said that the large-scale increase in lending in June was well ahead of market expectations. The sharp year-on-year rise in China’s M2 money supply, the steady recovery of credit demand from enterprises and households, as well as the rapid tightening of monetary policy by the Fed, means that Chinese monetary policy has now entered an “observation phase”.

The MLF rate remaining steady in July means that the loan prime rate (LPR) is unlikely to shift this month, while the 5-year LPR already declined by a sizeable 15 basis points in May.

Bank deposit costs have also seen a marked fall since April, following market-driven adjustments to deposit rates. In June the average weighted deposit rate for Chinese banks was 2.32%, for a decline of 0.12 percentage points compared to April.

Deposits comprise around 70% of liabilities at Chinese banks, so any decline in rates on deposits will support further falls in lending rates.