China Holds Interest Rates Steady, Drains Record Liquidity Amidst US Trade Uncertainty
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China's central bank, the People's Bank of China (PBOC), has refrained from cutting interest rates and drained a record amount of cash from the financial system, signaling a cautious approach as the country navigates rising trade tensions with the US.
The PBOC maintained the interest rate on its one-year medium-term lending facility (MLF) at 2%, a move anticipated by most economists, as reported by Bloomberg. However, the central bank also withdrew a net 1.15 trillion yuan ($158 billion) from the system via the MLF, marking the largest such drawdown since 2014.
Earlier this month, Chinese policymakers indicated a shift towards a "moderately loose" monetary policy, a change not seen in about 14 years, coupled with "more proactive" fiscal measures to support the economy. However, the authorities have yet to announce concrete stimulus plans, reflecting their wait-and-see approach ahead of potential tariff escalations under the new US administration.
"The steady MLF rate is within expectation and we hold on to forecast for cuts by 40-50 basis points in 2025," said Ming Ming, chief economist at Citic Securities Co., to Bloomberg. The liquidity withdrawal, Ming added, increases the likelihood of a cut to banks' reserve-requirement ratios, potentially as early as year-end.
The PBOC has been gradually downplaying the significance of the MLF as its primary policy tool, shifting its focus to the seven-day reverse repo rate to guide market borrowing costs. The seven-day rate has remained unchanged since a 20-basis point cut in late September.
On Wednesday, the PBOC offered 300 billion yuan of policy loans via the MLF, a significant reduction from the 1.45 trillion yuan offered in December. This marks the fifth consecutive month of net cash withdrawal from the system through the MLF.
The PBOC attributes this shift to ample liquidity in the market, according to Financial News, a newspaper backed by the central bank. The central bank has also developed additional tools to manage liquidity fluctuations related to MLF maturities.
Looking ahead, markets anticipate substantial rate cuts in China next year, a sentiment reflected in record-low benchmark sovereign bond yields this month. The yield on China's 10-year government bonds fell one basis point to 1.73%, nearing a record low.