In a bid to support its struggling economy, the People’s Bank of China (PBOC) has been actively injecting cash into markets and reducing lenders’ reserve requirements. On Friday, the PBOC offered 591 billion yuan ($81.2 billion) via the medium-term lending facility (MLF), marking the 10th consecutive month of such an operation and resulting in a net injection of 191 billion yuan. The interest rate on the MLF loan remained unchanged at 2.5%, following a surprise 15-basis-point cut last month.
This move comes on the heels of another significant decision by the PBOC on Thursday to lower the amount of cash that lenders must hold in reserve for the second time this year. This measure is expected to free up as much as 500 billion yuan, according to some estimates. The reserve requirement ratio (RRR) was reduced by 25 basis points for all banks, excluding those that have already implemented a 5% reserve ratio.
This RRR cut is projected to release over CNY500 billion of medium- and long-term liquidity and reduce bank capital costs by CNY7-8 billion per year, easing pressure from falling interest margins and profits due to declining mortgage interest rates, said Dong Ximiao, chief researcher at Merchants Union Consumer Finance Company to Yicai.
In addition to these measures, the PBOC also injected 34 billion yuan via 14-day reverse repurchase agreements on Friday to cover month-end cash demand. The central bank also reduced the interest rate on this short-term loan by 20 basis points. However, this reduction does not necessarily indicate fresh policy easing as it is viewed as a follow-up move after the recent cut to the cost of seven-day loans.
These latest moves by the PBOC underscore Beijing’s intention to expedite the recovery of the world’s second-largest economy. The funding support also comes at a time when banks need to meet seasonal demand arising from regulatory requirements, as well as a surge in local government bond issuance.
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