An upcoming maturity of policy loans in China will offer clues on how far its central bank will go in loosening policy.
A rollover of all 400 billion yuan ($61.8 billion) of medium-term lending facilities due Thursday, after a surprise reserve requirement ratio cut last week, will signal a significant shift to easing, according to Xing Zhaopeng, senior China strategist at Australia & New Zealand Banking Group Ltd. That’s not expected, with most analysts seeing either a reduction or a withdrawal of the loans.
The People’s Bank of China’s surprising dovish turn 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’s due just before the latest economic data. Some in the market, such as UBS Asset Management and Citic Securities, 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 in Shanghai.
China hasn’t lowered its rate on one-year medium-term lending facilities since reducing it to 2.95% in April last year and it has largely rolled over maturing MLF so far in 2021. 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% for the MLF rate remains the equilibrium level,” he said.
About 10 billion yuan of seven-day reverse repurchase contracts also come due Thursday, when the nation is set to report second-quarter GDP data. Economists expect headline growth to slow to 8% from the record 18.3% expansion seen in the first three months of the year.
The medium-term facilities coming due Thursday will be the first in a wall of maturing loans through December that total around 4.15 trillion yuan. That’s more than three times the 1.3 trillion that came due in the first half, which could provide the central bank ample opportunities to adjust liquidity levels should it choose to do so.
Most analysts still expect policy makers 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,” said Lu Ting, chief China economist at Nomura Holdings Inc. “That could hurt market stability and prompt a buildup in financial leverage, which doesn’t benefit the economy that much.”