MNI PBOC WATCH: PBOC Seen Providing Liquidity For Bond Sales

The People’s Bank of China will increase liquidity injections to support bond sales by local governments as they seek to swap off-balance sheet debt and is likely to further reduce reserve requirements this year, economists told MNI, after a benchmark rate was left unchanged.

The Loan Prime Rate, based on the PBOC’s medium-term lending facility rate and quotes submitted by 18 banks, remained at 3.45% for one year and 4.2% for more than five years on Friday, according to the PBOC’s website. The announcement was in line with expectations. (See MNI PBOC WATCH: Q3 Economic Rebound Lowers Rate Cut Chance)

Banks already suffering margin compression from an official drive for them to lower rates on outstanding mortgages have been reluctant to reduce LPR quotes, said Wang Qing, chief macroeconomic researcher at Golden Credit Rating. Lenders are also facing higher funding costs as lending remains robust and local government debt issuance drains liquidity, he said.

The PBOC is likely to significantly boost liquidity using its repo operations, medium-term lending facility and even by an RRR cut, he said.

RRR CUT BETTER OPTION

The Ministry of Finance has since September accelerated approvals for local governments to issue bonds to refinance off-balance sheet liabilities. As of Oct 13, as much as CNY726.2 billion of the bonds have been readied to be issued by 17 provinces, with over 80% so far bought by banks, an advisor who asked for the anonymity told MNI.

Over CNY1 trillion of special refinancing bonds will be issued this year and more are expected next year, which would require central bank support in both liquidity and interest rates, said the advisor.

Sheng Songcheng, a former head of the PBOC’s statistics department, told MNI on Tuesday that a reserve requirement cut would be a better option for the central bank than reducing the policy rate. (See MNI INTERVIEW: China GDP To Beat Expectations- Ex PBOC's Sheng)

The central bank pumped CNY289 billion of MLF into the interbank market last week, the largest monthly net injection since 2021, and a total of CNY1.5 trillion is maturing over the next two months, according to Choice, a data service provider. The PBOC injected CNY828 billion via 7-day reverse repos on Friday, resulting in a record high net injection of CNY733 billion after offsetting maturities of CNY95 billion.

The PBOC said in its OMO statement today that the operation was to offset the impact of tax payments and government bond issuance in a bid to retain liquidity at ample and reasonable levels in the interbank market.