China Cuts One-Year Policy Rate by Most Ever in Stimulus Drive
(Bloomberg) -- China’s central bank lowered the interest rate charged on its one-year policy loans by the most on record, kicking off a sweeping program to revive confidence in the world’s second-largest economy.
Most Read from Bloomberg
The People’s Bank of China cut the rate of the medium-term lending facility to 2% from 2.3%, according to a statement on Wednesday. The 30-basis-point cut was the biggest since the bank began using the monetary tool to guide market interest rates in 2016.
The expected move followed Governor Pan Gongsheng’s announcement the previous day of a broad stimulus package that amounted to an adrenaline shot for an economy on the cusp of a deflationary spiral.
“The cut is part of the package,” said Bruce Pang, chief economist for Greater China at Jones Lang LaSalle Inc. “The market is keeping a close eye on the strength, frequency and synergy of measures to follow as China strives to achieve this year’s around 5% growth goal.”
The yuan rallied past the 7 per dollar milestone for the first time in 16 months as investors digested China’s stimulus package. Chinese stocks extended their gains, with the onshore benchmark CSI 300 Index on track to wipe out all of its losses for 2024. The yield on China’s 10-year bonds fell 1 basis point to 2.05%.
The cut to the MLF rate is a prelude to more significant measures such as a promised reduction in the rate on seven-day reverse repurchase notes, which the PBOC increasingly favors as the main policy lever. The rate on those instruments will be lowered by 20 basis points to 1.5% “soon,” Pan said Tuesday.
What Bloomberg Economics Says...
“Looking ahead, we see room for the PBOC to do more on the rates front than Pan has signaled so far. There’s a chance the central bank could trim the seven-day reverse repo rate by a further 10 bps on top of the move Pan flagged on Tuesday.”
David Qu, economist
Read the full report here.
Reflecting the new framework, the monetary authority withdrew a net 291 billion yuan ($41.4 billion) via the MLF, the biggest drainage since December 2021.
The outstanding MLF loans are widely expected to be gradually replaced by other tools, including cash injections through reserve requirement ratio cuts, as the PBOC seeks to influence market borrowing costs more effectively.
“The MLF may be downgraded to become a tool to adjust the marginal borrowing costs of banks,” said Zhaopeng Xing, senior strategist at Australia & New Zealand Banking Group. “The MLF rate in the future could change following movements in market rates.”
The central bank chief revealed a plan to unleash 1 trillion yuan in long-term liquidity with a 50-basis-point reduction of the RRR, which determines the amount of cash lenders must keep in reserve. Along with other new funding tools, the measures more than compensated for the effect of the net withdrawal on market liquidity.
“Looking ahead, there is room for further replacement of MLF liquidity with RRR cut-induced liquidity given heavy MLF maturity in the coming months,” said Frances Cheung, a strategist at Oversea-Chinese Banking Corp.
The rate cut on the one-year lending Wednesday “renders the facility more aligned with the funding costs” in the interbank market, she added.
The earliest window for the repo rate cut to take effect could come after the week-long National Day holiday starting Oct. 1. The central bank has opted to provide 14-day reverse repo bills this week ahead of the break.
The PBOC is giving banks more say to influence the MLF’s prices by allowing them to bid the loans by interest rates, breaking away from the past practice of bidding by amount. On Wednesday, the central bank for the first time published the highest and lowest bidding rates for the MLF, at 2.3% and 1.9%, respectively.
Outstanding MLF declined for a second straight month in September after Wednesday’s operation, standing at the lowest since November 2023.
--With assistance from Shulun Huang and Qizi Sun.
(Updates with comments.)
Most Read from Bloomberg Businessweek
Palantir’s CEO and Wall Street Annoy Each Other Straight to the Bank
Five Reasons to Be Optimistic About the Entertainment Business
Threats to Local US Election Officials Are Rising, and More Workers Are Quitting
©2024 Bloomberg L.P.