Traders and analysts say the People’s Bank of China (PBOC) will watch for routine high cash demands from households and businesses ahead of the holiday. She wants to make sure there is enough money for this purpose and also to stimulate the economy, which is recovering from the shock of COVID-19, they said.
This year, the week-long Lunar New Year holiday begins on January 21.
The PBOC manages liquidity by providing loans to banks under its one-year medium-term lending facility (MLF). This month, 700 billion yuan ($104 billion) of that debt is coming due.
Twelve analysts expected the central bank to replace exactly that debt with 700 billion yuan in new lending, and 10 expected it to go further and lend a larger amount. The other three participants expected only a partial renewal of the debt, which arrived fortunately.
A large majority – 21 traders and analysts – expected the MLF rate to remain unchanged at 2.75% this month, while the other four respondents expected the rate to drop slightly.
“As the MLF’s 700 billion yuan deadline comes ahead of the Chinese New Year, full liquidity coverage is required as a minimum,” said Frances Cheung, rates strategist at OCBC Bank.
“But it is a question of the use of the instruments; if part of the liquidity is offset by short-term reverse repos, it would be a disappointment to the market.” Short-term reverse repos are another tool used by the PBOC to manage liquidity.
Markets still expect some easing of monetary policy to support the economic recovery, including reductions in policy rates and the amount of cash that banks must set aside as reserves.
Sluggish credit demand, weak domestic inflation and a stronger yuan should provide more policy space, they said.
“Moderate domestic price pressures mean that inflation will not be an obstacle to easing monetary policy,” Commerzbank analysts said in a note.
“The PBOC is likely to cut interest rates soon to help the economic recovery expected this year.”
The MLF rate acts as a guide to the country’s benchmark interest rates, the one- and five-year prime rates (LPR), which are set on 20 January. MLF and LPR rates usually move together.
Some traders expect monetary easing, likely a five-year LPR cut, to help the faltering housing sector after a slew of recent stimulus measures.
“There is still a possibility that the PBOC will further cut the FML rate by 10 basis points (bps) in Q1, leading to a further decline in the LPR, especially for the 5-year,” Standard analysts said. a note.
“However, further cuts beyond this level are unlikely as the net interest margin (NIM) of Chinese banks has fallen to record lows.”
($1 = 6.7361 Chinese Yuan)
