(Bloomberg) -- China’s largest loan maturity in months will offer clues on where the central bank stands on liquidity, after its restrained approach to stimulus spooked bond markets last week.
Some 403.5 billion yuan ($57 billion) of one-year funding through a medium-term lending facility will come due, the most since July. The People’s Bank of China will probably roll over the loans at an unchanged interest rate of 3.3%, according to Zhou Hao, a senior emerging markets economist at Commerzbank AG (DE:CBKG).
A deviation in the size of loans offered or the lending rate could be interpreted as a sign monetary policy may either ease further or remain prudent. There seems to be little hope for more meaningful easing than what’s already occurred, Zhou said. While a big increase in the MLF’s size would be marginally positive for bonds, he added it’s unlikely the central bank will continuously inject liquidity.
Fresh focus on the central bank comes as a manufacturing sector gauge hit it lowest level since February last month, suggesting more policy support is needed as businesses struggle amid a prolonged China-U.S. trade war. Meanwhile, the PBOC refrained last week from adding cash via its open-market operations or targeted monetary tool. That resulted in a net liquidity drainage of 590 billion yuan, the most since February.
Concern about the central bank’s cautious approach to policy easing -- occurring alongside rising inflation, an incoming deluge of local-government bond supply and improving risk sentiment -- has prompted traders to sell Chinese bonds of late. The benchmark 10-year sovereign yield climbed to the highest level since May last week and rose by the most in October in six months.
“The central bank is looking for a balance between policy easing and deleveraging,” Qu Hongbin, chief China economist at HSBC Holdings Plc (LON:HSBA)., said. It might keep some ammunition for the future, he said, given the uncertainties in the trade war.
