China Injects Loans While Avoiding Broad Easing

(Bloomberg) -- The People’s Bank of China offered 267.4 billion yuan ($39.8 billion) of targeted medium-term loans on Wednesday, a step that funnels money to some lenders while avoiding broad easing.

• The one-year funds carry an interest rate of 3.15 percent, the same as the PBOC’s debut TMLF operation in January and less than the 3.3 percent it charges on regular MLF financing

Key Insights

• The injection signals a calibrated approach to liquidity management, with the PBOC trying to keep money moving through the financial system while holding back market expectations for stronger easing
• That’s partly because the economy is recovering, thanks to earlier stimulus that drove stronger-than-expected growth in March credit figures and last quarter’s GDP
• The funding is the PBOC’s second use of the targeted version of its Medium-term Lending Facility. To get the cheaper financing, banks must pledge to lend more to small and private firms

Market Impact

• Bond yields held near recent highs after the operation, with 10-year sovereign debt yielding 3.43 percent, the most since November. The cost of one-year interest-rate swaps rose 4 basis points to 2.96 percent, the highest since July; this means traders are pricing in tighter liquidity in the future

What Analysts Say

• The TMLF offering is “lower profile, more targeted" than cuts to reserve-requirement ratios, which could create bubbles in the stock market, said Lu Ting, chief China economist at Nomura International Ltd. in Hong Kong. “The chance of an RRR cut in the coming month is very small."
  • “The PBOC’s tone has changed, which means the pace and scale of easing will moderate. The central bank will stay in a wait and see mode," he said. Still, "there’s a chance we may see RRR cuts in the second half as a large amount of MLF loans will mature"
• “There is limited room for further marginal easing," said Tommy Xie, an economist at Oversea-Chinese Banking Corp. in Singapore. “We have seen China’s monetary policy turn back to neutral in a way, from universal liquidity injection to more targeted liquidity injection"

Get More

• The PBOC asked banks to submit their demand for the targeted version of its medium-term lending tool last week, Bloomberg reported Tuesday
• The bank has responded twice this month to market rumors that more reserve cuts are on the way, saying that these are untrue
• Read: China Signals Less Stimulus, Undermining World’s Hottest Stocks

--With assistance from Xize Kang, Wenjin Lv, Heng Xie and Jing Zhao.

To contact Bloomberg News staff for this story: Yinan Zhao in Beijing at yzhao300@bloomberg.net;Claire Che in Beijing at yche16@bloomberg.net;Tian Chen in Hong Kong at tchen259@bloomberg.net

To contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, Sarah Wells, Philip Glamann

©2019 Bloomberg L.P.

With assistance from Bloomberg