 "People's Bank of China, PBOC")
By Iris Ouyang
China may hold a key interest rate and make liquidity abundant this week when a policy loan matures, maintaining accommodative conditions to aid a patchy economic recovery and increased debt sales.
The People’s Bank of China will keep the rate on its medium-term lending facility unchanged at 2.5% Monday, according to all 19 analysts surveyed by Bloomberg. The central bank will also roll over the 170 billion yuan ($23.5 billion) special loan, according to the median estimate of eight analysts who made forecasts about volume.
The PBOC may refrain from fresh stimulus given recent economic green shoots including improved manufacturing and consumption, while it also faces constraints from a widening US-China yield gap. That said, it may still need to loosen policy later this year as China’s recovery remains unbalanced due to renewed export weakness and persistent housing woes.
The Federal Reserve’s eventual pivot toward an easing stance, which is still expected within this year, may also encourage Beijing to reduce borrowing costs to help push through a deluge of sovereign debt issuance to fund growth.
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“In the near term, the PBOC would focus more on bank deposit rate and/or reserve requirement ratio cuts to lower banks’ liability costs, instead of MLF rate cut, mainly because of yuan and capital flow considerations,” according to Xiaojia Zhi, head of research at Credit Agricole CIB Hong Kong Branch, adding that liquidity remains “flush.”
The interest rate on a benchmark seven-day loan in China’s interbank market was at 1.83% Friday, down from this year’s high of 2.01% reached on March 27.
Liquidity is ample because government debt maturities are relatively big and loan demand in April is usually modest, countering pressure from new bond issuance and seasonal tax payments, said Bruce Pang, chief economist for Greater China at Jones Lang LaSalle Inc.
Despite the PBOC’s expected policy composure in the short term, a stalled rally in Chinese government bonds may resume in the coming months as investors remain adamant that fresh monetary loosening will come later in the year.
“Even if the MLF rate is held unchanged, market will likely hold expectation for some form of easing down the road,” said Frances Cheung, a strategist at Oversea-Chinese Banking Corp in Singapore. “A combination of fiscal and monetary measures shall sustain a steepening bias to the Chinese government bond curve.”
An impressive bull run in Chinese sovereign debt has shown signs of fatigue since last month, amid concerns about the slow pace of policy easing and higher debt supply that includes a planned 1 trillion yuan ultra-long special government bond this year.
To some observers, the upcoming ramp-up in government debt sales is part of the reason why policymakers will have to make funding even cheaper down the road.
“At this point of the cycle, it requires lower China government bond yields to support the economy,” said Marco Sun, chief financial market analyst, global markets division for China at Mitsubishi UFJ Financial Group Bank (China) Ltd. Sun expects yields on the 10-year note to drop 20 basis points by June.
