China’s Central Bank Intensifies Liquidity with Steady Rates Amid Economic Boost Efforts

The People’s Bank of China (PBOC) has recently implemented a significant liquidity boost in its financial system while maintaining steady interest rates on policy loans. This move involves injecting a substantial amount of funds, specifically a net increase of 800 billion yuan in December, into the banking system. This injection, which is part of the medium-term lending facility (MLF) loans, marks the largest monthly increase on record.

Despite the constant policy rate, there is widespread expectation among market participants that China will continue an accommodative monetary policy stance. This could include further stimulus measures such as cuts in interest rates and reductions in the reserve requirement ratio (RRR) to spur economic growth. This aligns with the PBOC’s objective to keep banking system liquidity ample and counteract short-term factors like government bond issuance, as well as to increase mid- to long-term base money supply.

Moreover, China has been progressively implementing fiscal stimulus measures to support its economy. Notably, Beijing approved a 1 trillion yuan sovereign bond issuance in late October, the first significant expansion of the budget deficit in a fiscal year in over two decades. This move enables local governments to frontload part of their 2024 bond quotas.

Market analysts predict that the PBOC may further ease monetary policy to achieve ambitious growth targets for the coming year. This easing could include additional RRR and policy rate cuts. Analysts from Goldman Sachs suggest that while further easing is expected, the PBOC may focus more on structural lending tools rather than broad-based instruments to support the economy in the near term.

The possibility of an interest rate reduction in China is gaining traction due to increasing deflationary pressures, which have led to higher real interest rates. With consumer prices falling at the fastest rate in three years in November and deepening factory-gate deflation, there’s anticipation that the PBOC might cut the MLF policy rate by 10-20 basis points and the RRR by 25-50 basis points in the upcoming year, along with increased utilization of other liquidity facilities​​​​​​​​​​​​​​​​.