China Extending Loans to Maintain Liquidity in Banking System

The People’s Bank of China (PBOC), China’s central bank extended total loans of 400 billion yuan ($58 billion) on Wednesday, January 15, 2020, in a view to maintaining adequate liquidity before the Chinese Lunar New Year. The central bank started lending fresh short- and medium-term loans to the country’s financial sector with the borrowing cost remained unchanged.

Loans to Ensure Enough Liquidity  

The PBOC, keeping a view to provide enough cash flow in the country’s market, announced to lend two separate loans with the same interest rate as the previous figure. The bank, after 14-days of ‘reverse repurchases,’ injected 300 billion Yuan ($43.51 billion) medium-term lending facility (MLF) loans at the interest rate of 3.25% and also extended its 100 billion Yuan with the interest rate unchanged at 2.65%.

Ming Ming, an economist with CITIC Securities, explained, “The PBOC’s injection of additional funds into the financial sector aimed to ease the tightening liquidity in a period of tax payment, and to supplement capital for local government bond issuance.” The central bank in its statement said that the loan was meant to “offset impact from factors including tax payment and cash demand” and ensure the sufficient availability of liquidity in the banking system before the week-long Lunar New Year holidays which will start from next Friday.

China remained facing a dip economic growth as domestic and global demand were reducing significantly last year. As Reuters’ poll reported this week, Beijing would be providing more support measures to address the present situations in the financial sectors. Traders also had been expecting a liquidity injection before the week-long holiday, however, some traders said the central bank’s decision to put on unchanged interest rates caused a slight disappointment. Ming said that interest rate cuts might be likely to happen after the Lunar New Year holidays as the policymakers intended to further lower lending costs to improve economic growth in 2020.

Lowering Loan Prime Rate (LPR) for 2020

Li Qilin, the chief analyst at Yuekai Securities, believed that the new financial policy would ease the constraints of the economic growth and if the stability of economic growth maintained, the LPR would be taken up soon by the central bank.

As Frances Cheung, head of the macro strategy for Asia at Westpac in Singapore, expected, “We continue to see each monthly LPR reset as presenting an opportunity for a baby-step 5 basis point cut. We expect more open market operations injections in the next few days. The market reaction should be muted as liquidity injections have been expected to cover demand.” Some analysts claimed, “some 257.5 billion Yuan worth of targeted medium-term loans will come due on January 23, 2020” and forecasted that the LPR may drop by 0.5 percentage points this month.

Referring to the new financial policy, Tommy Xie, an economist at Oversea-Chinese Banking Corp., said “The liquidity injection from the previous RRR cut wasn’t enough to fill the gap in January because of the earlier Chinese New Year holiday season, heavy bond issuance and tax payment. The offering is not a surprise.”

Analysts explained that around 3.8 trillion Yuan liquidity would be needed in January month as people are likely to withdraw a huge amount of cash because of the week-long holidays. The central bank authorities have indicated the possibility of lower borrowing costs for loans as the country expected economic stability soon.

I’m Roshan, a journalist, blogger and music lover. I like covering global news related to finance, business, and technology. Focusing on the collection of true and reliable information, I rely on working by conducting interviews with business leaders and talking to the inside sources of companies.

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