China keeps policy rate unchanged as policymakers balance yuan and economic risks

SHANGHAI, Nov 15 (Reuters) – China’s central bank partially rolled over its maturing medium-term policy bonds and kept the interest rate unchanged for a third consecutive month on Tuesday, suggesting policymakers are wary of deepening the weakness of the yuan by easing monetary conditions.

A global wave of interest rate hikes has limited Beijing’s ability to sustain a faltering economy, with the falling yuan raising the risks of large-scale capital outflows as investors seek higher yield premiums elsewhere, especially especially those offered by US bonds.

Data released earlier in the day underscored mounting pressure on the world’s second-largest economy as a fresh wave of COVID outbreaks led to further loss of momentum.

The People’s Bank of China (PBOC) said it was keeping the rate on 850 billion yuan ($120.21 billion) of one-year medium-term loans (MLF) to certain financial institutions at 2.75% , unchanged from the previous operation. .

“Forex market stabilization is still high on the macro policy agenda,” said Wang Qing, chief macro analyst at Dongfang Jincheng.

“Keeping policy rates stable will help curb widening interest rate differentials between China and the United States and stabilize currency market expectations.”

In a poll this week of 31 market watchers, all participants expected the PBOC to keep the interest rate unchanged, while 22 expected the central bank to renew entirely. maturing loans.

With 1 trillion yuan of MLF loans set to expire on the same day, the operation resulted in a medium-term net cash outflow of 150 billion yuan through the instrument.

The central bank said the latest operation was aimed at countering increased demand for liquidity due to tax payments and maintaining “reasonably sufficient liquidity in the banking system”.

The PBOC has offered 320 billion yuan of medium- and long-term liquidity through additional pledged loans (PSLs) and a lending facility since early November, it added.

“The total amount of medium and long-term liquidity injection exceeded the MLF deadline this month,” the PBOC said in an online statement.

Separately, the central bank also injected 172 billion yuan through seven-day reverse repos while keeping borrowing costs unchanged at 2.00%, compared to 2 billion yuan of such loans expiring on the same day. .

China’s economy has been rocked by a fresh wave of COVID-19 infections across the country in recent weeks, disrupting business activity and household consumption. A slew of data Tuesday on factory production, retail sales and real estate investment pointed to further loss of momentum and a darkening outlook.

The authorities walk a tightrope when it comes to politics. The PBOC’s decision to lower policy rates in August to revive credit demand and support an economy hit by COVID shocks accelerated the decline of the yuan.

The yuan has fallen about 10% against the dollar so far this year and is expected to see the worst annual performance since 1994, when China unified the market and official rates. It hit 7.0508 to the dollar around noon, up slightly from Monday.

Xing Zhaopeng, senior China strategist at ANZ, said any further monetary policy stimulus will largely depend on credit demand, which fell more than expected in October.

The central bank “will continue to maintain ample liquidity, but the chances of an interest rate cut are low,” he said.

($1 = 7.0710 Chinese Yuan)

Reporting by Winni Zhou and Brenda Goh; Editing by Edmund Klamann & Shri Navaratnam

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