China’s central bank declared on Friday its decision to maintain the status quo on a crucial policy rate, while withdrawing funds from a medium-term policy loan operation.
This action is perceived as consistent with the authorities’ ongoing endeavour to give priority to currency stability amidst uncertainty surrounding the timing of anticipated interest rate cuts by the Federal Reserve.
The Chinese yuan confronts pressure from tightening US monetary policies. The Federal Reserve’s significant monetary tightening, while strengthening the dollar, has been exerting pressure on the Chinese currency for the past few years. Lowering rates prior to actions by the Fed or other central banks would widen yield differentials, potentially intensifying pressure on the local currency.
The People’s Bank of China (PBOC) stated that it would maintain the rate on 387 billion yuan ($53.80 billion) worth of one-year medium-term lending facility (MLF) loans to certain financial institutions at 2.50 percent, unchanged from the previous operation, as reported by Reuters.
With 481 billion yuan worth of MLF loans set to mature this month, the operation resulted in a net withdrawal of 94 billion yuan from the banking system. This marked the first withdrawal of cash through the liquidity instrument since November 2022.
The central bank stated that Friday’s loan operation has satisfactorily met the demand of financial institutions to maintain reasonably ample liquidity in the banking system, according to an online statement.
“Net cash withdrawal is a clear signal, echoing the content of the government work report on preventing idle funds,” the Reuters report cited Xing Zhaopeng, senior China strategist at ANZ, as saying. “Given major commercial banks have not yet lowered deposit rates again, chances of another policy rate cut are low,” Zhaopeng added.
China has set an ambitious economic growth target of around 5 percent for 2024, pledging measures to reshape the country’s development model and mitigate risks stemming from insolvent property developers and indebted cities, according to Arabian Business.
PBOC Governor Pan Gongsheng remarked last week that the bank would maintain the yuan’s stability and conveyed a dovish message to the market by stating that China possesses “abundant monetary policy tools” at its disposal.
