China’s Central Bank Lowers Medium-Term Loan Rates

SHANGHAI (Reuters) – China’s central bank, the People’s Bank of China (PBOC), lowered the cost of its medium-term loans to banks on Wednesday, in line with broad policy easing measures announced a day earlier to bolster the struggling economy.

The PBOC cut the rate on 300 billion yuan ($42.66 billion) worth of one-year medium-term lending facility (MLF) loans to some financial institutions from 2.30% to 2.00%.

The bid rates for Wednesday’s operation ranged from 1.90% to 2.30%, with the total balance of MLF loans now at 6.878 trillion yuan, according to the central bank’s online statement.

Financial News, backed by the PBOC, indicated that disclosing bid rates for the first time reflects the differing mid- and long-term funding needs of various institutions, aligning with the central bank’s commitment to enhance transparency in monetary policy.

The MLF auction results were released separately from open market operations, which marked a distinction from the seven-day reverse repo rate, now regarded as the main policy rate. The adjustment allowed MLF to fulfill its role as a mid- to long-term liquidity tool.

A batch of 591 billion yuan worth of MLF loans is set to expire this month. On Tuesday, Beijing announced its largest stimulus since the pandemic to rescue the economy from deflation and move toward the government’s growth target.

Frances Cheung, head of FX and rates strategy at OCBC Bank, commented that the partial rollover was expected, particularly with the planned 50-basis-point cut to the reserve requirement ratio (RRR), indicating that banks may soon have more flexibility with their cash holdings. Cheung also mentioned that, given significant MLF maturities in Q4, there remains potential for another RRR cut before the year’s end.

The PBOC’s disclosure of the highest and lowest bids indicates an intention to make the facility more demand-driven, diminishing the MLF rate’s role as policy guidance.

On the same day, the PBOC injected another 196.5 billion yuan through 14-day reverse repos, maintaining the interest rate at 1.85% from the prior operation.

($1 = 7.0318 Chinese yuan)