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China central bank set to inject fresh funds through medium-term policy loan

China’s central bank is set to inject more liquidity when rolling over maturing medium-term policy loans for a fourth straight month on Wednesday, while keeping the interest rate unchanged, to support the economy, a Reuters survey showed.

The People’s Bank of China (PBOC) will continue to keep long-term funds sufficient, traders and analysts said, adding that the modest economic growth target this year suggests policymakers are comfortable with the pace of recovery.

China ended more than three years of a stringent zero-COVID policy involving city-wide lockdowns and extensive quarantine in December. The economic reopening has boosted consumption and business activity, raising the prospect of a faster recovery which reduces the likelihood of massive monetary easing.

In a poll of 28 market watchers conducted this week, all participants predicted the PBOC would keep the interest rate on the one-year medium-term lending facility (MLF) unchanged at 2.75%.

Among them, 20 or 71% of all respondents expected the central bank to inject fresh funds to exceed the amount maturing, while the remaining eight traders and analysts forecast just a full rollover. This month, 200 billion yuan ($29.10 billion) of such debt is maturing.

“An outsized MLF rollover of 300 to 400 billion yuan is probably needed as market liquidity demand shall stay high on still heavy negotiable certificate of deposit (NCD) refunding needs and ongoing local government bond (LGB) supply,” said Frances Cheung, rates strategist at OCBC Bank.

China set the target for economic growth this year at around 5% at the annual session of the National People’s Congress (NPC). The target was at the low end of expectations, as policy sources had recently told Reuters a range as high as 6% could be set. It is also below last year’s target of around 5.5%.

“The policy signals from the PBOC and the NPC point to a reduced likelihood of an MLF rate cut this year,” said Tommy Wu, senior China economist at Commerzbank (ETR:CBKG).

“This is because policymakers probably expect a relatively good start for the economy this year and less policy support is warranted. This is particularly given the conservative and modest ‘around 5%’ target for 2023.”

Some investors also noted China’s monetary policy should remain stable after Beijing surprised by keeping its central bank governor and finance minister in their posts, prioritising continuity as economic challenges loom at home and abroad.

The MLF rate serves as a guide to the loan prime rate (LPR)and markets mostly use the medium-term policy rate as a precursor to any changes to the lending benchmarks. The monthly fixing of the LPRs is due next Monday.
Source: Reuters

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