China unexpectedly cuts 2 key rates, withdraws cash from banking system

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The headquarters of the People’s Bank of China (PBOC), the central bank, is pictured in Beijing, China, September 28, 2018. REUTERS/Jason Lee

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SHANGHAI, Aug. 15 (Reuters) – China’s central bank unexpectedly cut a key rate for the second time this year and withdrew some money from the banking system on Monday to try to revive credit demand to support the COVID-affected economy.

Economists and analysts said they believe Chinese authorities are keen to support the sluggish economy by allowing greater policy divergence with other major economies aggressively raising interest rates.

The People’s Bank of China (PBOC) said it cut the interest rate on 400 billion yuan ($59.33 billion) of one-year medium-term loans (MLF) to some financial institutions by 10 basis points (bps) to 2.75%, from 2.85%.

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In a poll of 32 market viewers last week, all respondents had predicted that the MLF rate would remain unchanged and 29 had predicted a partial rollover. read more

“The rate cut surprises us,” said Xing Zhaopeng, senior China strategist at ANZ.

“It should be a reaction to Friday’s weak credit data. The government remains cautious about growth and won’t let go.”

New bank loans in China fell more than expected in July, while broad-based credit growth slowed as new COVID flare-ups, job concerns and a deeper real estate crisis left businesses and consumers wary of taking on more debt. read more

The PBOC attributed its move to “keeping the liquidity of the banking system reasonably ample”. And with the expiration of 600 billion yuan MLF loans, the operation resulted in a net drawdown of 200 billion yuan.

Market participants have largely priced in the partial rollover, as the banking system was already awash with cash, with interbank money rates hovering at their lowest level in two years and consistently below policy rates.

“In retrospect, the current 10bp cut could be seen as front-loading before policy space narrows going forward as the PBOC sees structural inflationary pressures,” said Frances Cheung, interest rate strategist at OCBC Bank.

The PBOC reiterated that it would ramp up the implementation of its prudent monetary policy and keep liquidity fairly ample, while closely monitoring domestic and external inflation changes, it said in its second-quarter monetary policy report.

“Despite warnings of inflation risk and liquidity conditions, the predominant downside risks under the COVID spread and the real estate crisis have prompted the PBOC to cut interest rates to boost demand,” said Ken Cheung, Asian FX chief executive. strategist at Mizuho Bank.

China’s 10-year government bond rose by more than 0.7% in early trading after the interest rate decision, while yields on similar-maturity government bonds fell by about 5 basis points.

The central bank also injected 2 billion yuan through seven-day reverse repos, while cutting borrowing costs by the same margin of 10 basis points from 2.1% to 2.1%, according to an online statement.

The PBOC cut both rates by 10 basis points in January.

($1 = 6.7425 Chinese Yuan)

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Reporting by Winni Zhou and Brenda Goh; Editing by Kim Coghill and Neil Fullick

Our Standards: The Thomson Reuters Trust Principles.

The Valley Voice
The Valley Voicehttp://thevalleyvoice.org
Christopher Brito is a social media producer and trending writer for The Valley Voice, with a focus on sports and stories related to race and culture.

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