Chinese Central Bank Cuts Reverse Repo and MLF Rates in Open Market Operations

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The People’s Bank of China (PBOC) has cut both the short-term and medium-term rates for the main instruments employed in its open market operations (OMO).

On 15 August PBOC undertook 400 billion yuan in one-year medium-term lending facility (MLF) operations and 2 billion yuan in 7-day reverse repo operations, for the purpose of “maintaining rationally ample liquidity in the banking system.”

PBOC reduced the rates for both MLF and reverse repos by 10 basis points, to 2.75% and 2.00% respectively.

Zhou Maohua (周茂华), financial markets macro-researcher with China Everbright Bank, said to state-owned media that the MLF cut was in excess of market expectations, and sends the signal PBOC is increasing efforts to support the real economy and stable growth via monetary policy.

The move from PBOC also arrives following a year-on-year contraction in Chinese lending growth for the month of July.

“Looking at the financial data for July, at present the money supply remains ample, but financing demand from the real economy remains weak,” Zhou said.

“Downwards adjustment to the MLF drives financial institutions to further reduce the financing costs for the real economy, spurs activity by small-scale market actors, drives consumption and stabilises investment recovery.”

Wang Qing (王青), chief macro-analyst with Golden Credit Ratings, also said that the cuts to PBOC’s policy rates were due to lacklustre levels of lending in July.

“July financial data indicates that new lending and total social financing (TSF) both fell that month, while year-on-year growth also eased.

“The chief reasons behind this was slow progress in the recovery of the economy at present, and insufficient financial demand from the real economy.

“Reductions to the cost of financing will spur financing demand from the real economy, and is now becoming a key focal point for policy.

“At the same time, reductions to policy rates drives reductions to real estate loan rates, and can also improve market expectations, driving a recovery in the property market as soon as possible.”

Wang said he expects financial data to show marked improvement in August, following large-scale reductions to interest rates for bank loans, as well as the impact of monetary policy tools and new policy financial instruments.

“This will buffer downwards volatility in the economy, and set firm foundations for a recovery of GDP to a regular range as soon as possible in the second half.”

“Prior to the current round of policy rate reductions, market rates were already significantly below the policy rates, and the market was concerned that market rates would contract towards the policy rates,” said Jie Yunliang (解运亮), chief macro-analyst with Cinda Securities.

“Looking at things now, this concern is unnecessary. On the contrary, at present loan demand, including home loan demand, is still weak, and further reducing the cost of total social financing is highly necessary is needed to stimulate financial demand in the real economy and stabilise the real estate market.”