China withdrew cash from its banking system for a fifth consecutive month amid caution towards monetary easing as currency depreciation pressures mount.
The People’s Bank of China drained a net three billion yuan (S$554.1 million) of cash via its medium-term lending facility on Monday (Jul 15), while holding the interest rate on its one-year policy loans at 2.5 per cent, as the Third Plenum gets underway in the nation’s capital. The twice-a-decade meeting of China’s top leadership has at times marked pivotal policy shifts.
All nine analysts surveyed by Bloomberg had predicted the rate to remain unchanged and economists are largely expecting the one-year MLF to be phased out.
“The net drain suggests a hawkish tone of the PBOC for the concerns over financial stability,” said Xing Zhaopeng, senior China strategist at Australia & New Zealand Banking Group. “The Third plenum will likely outline a reform to the policy rate system, which will play down the role of MLF in monetary policy.”
Authorities are facing an increasingly difficult task of managing economic risks and dealing with policy divergence from the US, where rate-cut bets are shifting back and forth as inflation remains sticky. The decision to maintain the interest rate shows concerns that fresh monetary easing may further weaken the yuan and exacerbate capital flight, given an already-wide gap between US and China yields.
Analysts had expected the central bank to offer 90 billion yuan of MLF loans with 103 billion maturing in July, according to the median estimate of analysts who made forecasts about volume.
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Data on Monday showed China’s economic growth fell to the worst pace in five quarters. Gross domestic product expanded 4.7 per cent in the second quarter from the same period a year earlier. Industrial output last month beat expectations while retail sales missed forecasts.
The yuan has fallen about 2 per cent this year despite consistent support by Beijing, as the pushback of expectations for a Fed rate cut favors the US dollar. The offshore yuan pared declines after the data and MLF decisions. It was down 0.1 per cent at 7.2770 per US dollar after dropping as much as 0.2 per cent earlier.
The MLF decision comes as its role in China’s money market is under the spotlight after PBOC governor Pan Gongsheng said Beijing is studying shifting to a short-term rate to guide markets. A proposed new system of repurchase operations based on the seven-day repurchase rate has strengthened expectations for that to become the new policy benchmark. BLOOMBERG
