MNI PBOC WATCH: Ample Liquidity Ensured Amid Bull Stock Market

The People’s Bank of China is keeping liquidity ample to support credit supply and reassure bond traders, even as a bull stock market draws funds away from bonds, while holding policy rates steady amid economic uncertainty.

On Wednesday, the Loan Prime Rate was left unchanged at 3.0% for the one-year tenor and 3.5% for the five-year in line with expectations.  (See MNI PBOC WATCH: LPR To Hold Despite Looming Headwinds) Both rates were last cut by 10bp in May after the PBOC lowered the 7-day reverse repo rate – its key policy rate – to 1.4% on May 8, followed by a 50bp reduction in the reserve requirement ratio (RRR) on May 15.

Despite leaving rates stable, the PBOC has injected a net CNY1.6 trillion into the interbank market since last Friday to offset liquidity drained by mid-month tax payments and a sharp equity-driven selloff in bonds earlier this week, which triggered large redemptions.

MODERATELY ACCOMMODATIVE

Governor Pan Gongsheng said in May that a “moderately accommodative monetary policy” means maintaining ample liquidity and loose financing conditions, including reasonable growth in aggregate financing and broad money supply (M2), alongside low overall financing costs. The Bank would adjust monetary tools in line with domestic and international conditions and financial market performance, he added. 

In July, aggregate social financing rose CNY1.16 trillion, up CNY389.3 billion y/y, with outstanding financing up 9.0% y/y compared with 8.9% in June, supported by faster government debt issuance. M2 growth accelerated to 8.8% y/y from 8.3% in June.

Still, policy advisors and economists told MNI there remains scope for further rate cuts later this year if economic pressures intensify. However, officials are wary of sliding into a Japan-style liquidity trap and will resist excessive easing.(See MNI: Tariffs, Weak Demand To Drive Moderate PBOC Easing In H2)

Zhao Xijun, co-dean of the China Capital Market Research Institute at Renmin University, said weak domestic demand will limit the scope for broad policy loosening, with the PBOC more likely to rely on targeted and structural tools. Policymakers will seek to balance external uncertainties with stable investment and consumption, while using targeted measures to avoid excessive volatility in equity and foreign exchange markets, he added.