PBOC renews more policy loans than expected to drive growth

(Bloomberg) – China’s central bank has rolled over most of its maturing medium-term political loans, a move aimed at supporting economic growth amid resurgent Covid cases. Government bonds offset earlier losses.

The People’s Bank of China injected 600 billion yuan ($ 92.6 billion) into the financial system through its medium-term loan facility, with nearly 700 billion yuan maturing on Tuesday. About half of the 13 analysts polled by Bloomberg before the operations predicted that the PBOC would reduce the funding amount to around 500 billion yuan.

China’s 10-year benchmark bond yield fell one basis point to 2.88% after rising about two basis points the day before the MLF deal. Ten-year bond futures rose 0.1 after key economic data missed estimates.

Authorities expect authorities to do more to support growth, as new virus outbreaks add new risks to a recovery already hit by flooding and declining global demand. The PBOC faces growing calls to cut interest rates, although an unexpected acceleration in inflation in July raised concerns that price pressures were not transient.

“Today’s transaction is a little higher than expected, which may help allay fears of a tightening liquidity,” said Hao Zhou, senior emerging markets economist at Commerzbank AG in Singapore. “We cannot rule out the possibility of another reduction in the reserve requirement ratio before the end of the year to roll over further MLFs to come, but we do not expect a cut in key rates.”

The PBOC kept the MLF rate at 2.95%, while adding 10 billion yuan through seven-day reverse repurchase agreements in its open market operations, corresponding to the amount coming due.

Asia’s second-largest government debt market has rallied in the past eight weeks, in part on speculation the central bank will trigger further easing after cutting the reserve requirement ratio in July. Bond gains slowed after data earlier this month showed factory exit inflation jumped to 9%, adding to signs that inflation pressures are building.

Other sectors of the Chinese economy show less exuberance. Retail sales rose 8.5% in July from a year earlier, less than an expected increase of 10.9%, government data showed on Monday. Industrial production climbed 6.4% during the period, below the median estimate of 7.9%.

“The weakness has been seen across the board,” said Zhaopeng Xing, senior China strategist at Australia & New Zealand Banking Group Ltd. in Shanghai. “As the PBOC prioritizes lower financing costs, more easing can be expected.”

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