China expected to partially roll over policy loans at stable rate

China’s central bank could drain liquidity next Monday via a partial rollover of maturing medium-term loans, while keeping policy rates stable, a Reuters survey showed, as ample market liquidity and a falling yuan reduce the need for imminent policy easing.

But some still expect the People’s Bank of China (PBOC) to ease bank reserve requirements next month, to help an economy hit by the COVID-19 pandemic and struggling real estate market.

Most of the 27 participants in this week’s poll said they expect the PBOC to partially renew 50 billion yuan ($6.98 billion) in policy loans maturing on Saturday. Only three expected full refinancing, while three others anticipated cash injections.

All survey respondents expect the interest rate on the one-year Medium Term Loan Facility (MLF) to remain unchanged at 2.75%.

Traders point out that the Chinese banking system is not short on liquidity, as evidenced by the fact that market rates are below policy rates, which is dampening demand for central bank loans.

The scope for easing is also limited by the weakness of the yuan, which has lost more than 11% against the dollar so far this year.

“We don’t expect policy rate cuts until the pressure on the currency eases,” wrote Zichun Huang, an economist at Capital Economics.

Zhou Maohua, an analyst at China Everbright Bank, said strong credit expansion in September also made monetary easing less urgent.

New bank lending in China nearly doubled in September from the previous month and far exceeded expectations.

But some participants still expect the PBOC to step up the injection of liquidity into the banking system, in a bid to accommodate the fiscal expansion. (Reporting by Shanghai Newsroom; Editing by Ana Nicolaci da Costa)

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