China infuses 200bn Yuan into its economy, interest rates not changed

The central bank of China has infused 200bn CNY into the economy via its lending facilities for medium term this week which is the 2nd time this month to encourage growth. Chinese economy is in bad shape due to trade war with US. Though it did not change the lending rate, this move caught the markets unawares as funds were injected just last week. Some traders stated that this injection of fresh cash was a direct response to tight conditions of interbank market liquidity that pushed up cost of borrowings. The fund injected by MLF loans will make up for liquidity shortfall after multiple cuts in RRR. During short term upswing in inflation in consumer prices was restraining policy makers from cutting down on interest rates. After sluggish credit lending data during October the central bank had to release cash in the market for supporting growth of economy.

Though price inflation of consumers is high and real borrowing costs remain high the PPI is even now in negative range. As the country’s economic growth slowed down to 30 year lows markets are keeping a close watch for signs of stress in liquidity as government recently took over one Inner Mongolia bank and several small banks.  This has raised doubts about financial health of several small lenders in the country.

According to a notice on website of PBOC posted this week the interest on 12 months MLF loans is 3.25% similar to previous instance. The bank stated that MLF loans released during 2nd phase of RRR cut to keep banking system’s liquidity reasonably sufficient. Last week, when the MLF loan interest rate was cut by central bank for the 1st time after 2016 Feb it was only by a thin five basis points. But then it also infused 400 billion Yuan within financial bodies through this liquidity tool.

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