China Holds Policy Loan Rate Steady as Economic Stabilization Efforts Continue

“It is a well-expected move, given that market liquidity [has] remained ample,” said Bruce Pang, chief economist and head of Research, Greater China at JLL, referring to the PBOC’s move in October to pump 500 billion yuan into the banking system.

Keeping the MLF rate unchanged gives for “greater policy manoeuvrability” given the change in government in the United States, at a time when commercial banks’ net-interest margins have remained narrow, Pang said.

Official data from the national financial regulatory agency show that overall commercial bank margins fell to 1.53% at the end of September. That is considerably below the 1.8% benchmark that regulators consider required to sustain “reasonable profitability.”

The bid rates in Monday’s operation varied from 1.90% to 2.30%, and the total MLF loans are currently 6.239 trillion yuan, according to the central bank’s announcement.

PBOC Revises Policy Framework

Wang Tao, senior China economist at UBS Investment Bank, expects the MLF to remain at 2.0% this year before falling to 1.2% by the end of 2025 and 1.0% in 2026.

China has also been revising its policy rate structure in order to exert greater influence over market borrowing costs. To do this, it uses the interest rate on seven-day reverse repurchase agreements as the primary anchor, while downplaying the impact of MLF.

In recent months, the PBOC has employed various liquidity tools to inject funds into the banking system, including as outright reverse repo transactions and government bond purchases.

US Dollar Strength Puts Pressure on RMB, Delaying Potential Rate Cuts by PBOC

Zhiwei Zhang, president and senior economist at Pinpoint Asset Management, believes the PBOC would hold off on further rate reduction until the new US government takes office in January, which is expected to raise duties on Chinese exports.

The rapid strengthening of the US dollar has placed pressure on other currencies, particularly the RMB, he said, adding that the PBOC is not in a hurry to decrease interest rates right now.

Since the November 5 presidential election in the United States, the offshore yuan has fallen by little more than 2%.

A delayed fall in [MLF] lending rates would further strengthen the yuan versus the strengthening greenback, according to JLL’s Pang.

The offshore Chinese yuan has fallen approximately 3.3% against the dollar since September 24, when Beijing began the initial wave of stimulus initiatives aimed at bolstering its flagging economy. On Monday, the offshore yuan was last traded at 7.2472.