(Bloomberg) -- China’s central bank reduced the cost of 1-year funds to banks for the first time since 2016, calming markets nervous about tightening liquidity amid a slowing economy.
The People’s Bank of China lent 400 billion yuan ($57 billion) with its medium-term lending facility and lowered the interest rate on the loans to 3.25% from 3.3%, according to a statement. The injection replaced 403.5 billion yuan of loans that mature Tuesday.
The reduction doesn’t represent a direct cut in borrowing costs to the economy, and reflects the bank’s cautious approach to stimulus amid concern about rising debt and inflation. However concern about that cautious stance prompted traders to sell Chinese bonds last month.
The benchmark 10-year sovereign yield climbed to the highest level since May last week and rose in October by the most in six months. China’s 10-year government bond yield declined 2 basis points to 3.276% on Tuesday, erasing an earlier gain. Futures on the debt rose as much as 0.35% to the highest level in over a week.
“The cut does not mean PBOC has changed its monetary policy stance,” said Xing Zhaopeng, a markets economist at Australia & New Zealand Banking Group Ltd. in Shanghai. Macro leverage continues to be a prioritized concern, he said, adding that “the cut indicates the declining PPI carries more weight than surging CPI in the monetary policy decision.”
Authorities refrained from adding cash via open-market operations or with a targeted monetary tool last week, resulting in a net liquidity drainage of 590 billion yuan -- the most since February.
Details of recent and upcoming operations
“As we see from macro data, China needs further targeted easing to support the slowing economy and now with a firmer yuan versus the dollar, they finally have room to cut MLF,” said Stephen Chiu, an Asia FX and rates strategist at Bloomberg Intelligence. The loan prime rate will probably be lowered further but another targeted reserve requirement ratio cut might still be needed in December, he added.
(Updates with throughout with comment, chart, more details.)
