Is there a liquidity crunch emerging in the Chinese money markets and financial system after the country’s central bank raised eyebrows on Thursday with what amounts to a second cut in a key interest rate in four days—an unheard-of move?
At the same time, the central bank trimmed collateral requirements, allowing banks to sell more bonds to raise cash—a move that was seen as helping keep liquidity levels high.
Western media outlets reported that the People’s Bank of China conducted an unscheduled lending operation at steeply lower rates, suggesting authorities are trying to provide heavier monetary stimulus to prop up the struggling economy. The central bank trimmed its medium-term lending facility only four days after it cut several benchmark lending rates on Monday, just days after a top leadership meeting, which had outlined major reforms and policy changes that played down the dangers from the property crunch.
The People's Bank of China (PBOC) issued 200 billion yuan ($US27.5 billion) in one-year loans under its MLF at 2.30%, down 20 basis points from its previous MLF loan, the bank said in a statement.
That is the biggest rate cut since China’s economy was slammed by the COVID-19 pandemic in 2020.
It also injected 235.1 billion yuan into markets through seven-day reverse repos at 1.70%.
Thursday's action was a surprise because the PBOC traditionally conducts its MLF operations in the middle of each month.
Earlier on Thursday, big state-run banks cut deposit rates to relieve pressure on their finances, reducing the rate paid on one-year fixed deposits by 10 basis points to 1.35%.
The cuts were made by the so-called “Big Four” banks: Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, and China Construction Bank.
The official Xinhua news agency said banks cut deposit rates three times last year, but this was the first reduction for 2024.
China's stock markets reacted negatively to the news, taking the sudden urgency on the part of authorities to lend to mean the deflationary pressures and weakness in consumer demand are more severe than what is priced into assets.
The Hang Seng Index was down 1.4% in mid-afternoon Thursday, also taking its lead from the big sell-off in New York on Wednesday.
Mainland stock markets were down, but not by as much as the drop in Hong Kong.
Thursday’s rate cut also helps relieve pressure in the bond market since the central bank also has cut collateral requirements for its medium-term lending facility, enabling lenders to sell bonds normally used as collateral.
