China keeps key lending rate unchanged as policymakers balance yuan, economic risks

SHANGHAI, Nov 15 (Reuters) – China’s central bank partially carried over maturity of medium-term policy loans and kept the interest rate unchanged for a third straight month on Tuesday, suggesting policymakers remain wary of fueling further yuan weakness by easing monetary conditions relieved.

A global wave of interest rate hikes has limited Beijing’s ability to support a faltering economy, with a falling yuan currency raising the risks of large-scale capital outflows as investors seek higher yield premiums elsewhere – particularly those offered by US bonds.

Data released earlier in the day underscored mounting pressure on the world’s second-largest economy as a new wave of COVID outbreaks led to a further loss of momentum.

The People’s Bank of China (PBOC) said it kept the rate on 850 billion yuan ($120.21 billion) worth of one-year medium term loan facility (MLF) loans to some financial institutions at 2.75%, unchanged from the previous operation.

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“The stabilization of the currency market continues to occupy an important place in the macro policy agenda,” said Wang Qing, chief macro analyst at Dongfang Jincheng.

“Keeping policy rates stable will help limit widening interest rate differentials between China and the United States and stabilize FX market expectations.”

In a poll of 31 market watchers this week, all participants expected the PBOC to keep interest rates unchanged, while 22 of them expected the central bank to fully roll over maturing loans.

With 1 trillion yuan of MLF loans due to mature on the same day, the operation resulted in a net medium-term cash withdrawal of 150 billion yuan through the instrument.

The central bank said the latest operation was aimed at countering increased cash demand due to tax payments and to keep “banking system liquidity reasonably ample”.

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The PBOC has offered 320 billion yuan of medium to long-term liquidity through pledged supplementary loans (PSL) and refinancing facilities since the start of November, he added.

“The total amount of mid- to long-term liquidity injection exceeded the MLF maturity date this month,” the PBOC said in an online statement.

Separately, the central bank also injected 172 billion yuan through seven-day reverse repos, while keeping borrowing costs unchanged at 2.00%, compared with 2 billion yuan of such loans maturing on the same day.

China’s economy has been rocked by a new wave of COVID-19 infections across the country in recent weeks, disrupting business activity and household consumption. A slew of data on factory output, retail sales and real estate investment on Tuesday pointed to a further loss of momentum and a darkening outlook.

Authorities are walking a tightrope over policy. The PBOC’s decision to cut key rates in August to revive credit demand and support an economy hurt by COVID shocks accelerated the yuan’s declines.

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The yuan has tumbled about 10% against the dollar so far this year and looks poised for its worst annual performance since 1994, when China unified market and official rates. It hit 7.0508 per dollar by midday, slightly higher than Monday.

Xing Zhaopeng, senior China strategist at ANZ, said any new monetary policy stimulus would largely depend on demand for credit, which tumbled more than expected in October.

The central bank will “continue to maintain ample liquidity, but the chances of an interest rate cut are low,” he said.

($1 = 7.0710 Chinese yuan)

Reporting by Winni Zhou and Brenda Goh; Editing by Edmund Klamann & Shri Navaratnam

Our Standards: The Thomson Reuters Trust Principles.

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