The Chinese yuan is trading mixed against a basket of currencies in the middle of the trading week as investors weigh the latest cash injection in the banking system. With calls for the bond market requiring additional liquidity, will the People’s Bank of China (PBoC) follow through on its pledge earlier this month and be even more aggressive in the second half of 2020?
On Wednesday, the central bank has extended medium-term loans to financial institutions as part of efforts to avoid a credit crunch this month. The PBoC allocated $28 billion through the medium-term lending facility (MLF) at an interest rate of 2.95%. Local experts say this measure was widely anticipated because officials had earlier said it would roll over the one-year funds, though the moves were a bit more cautious than what was initially projected.
It is estimated that more than $379 billion will be eliminated from the nation’s financial system this month due to maturing bank debt and policy loans. This concerned PBoC heads because now it will need to engage in accommodative and supportive mechanisms to avoid producing a credit bubble.
In recent months, the medium-term lending facility has become the benchmark monetary policy tool as its balance has spiked at an annualized rate of 15.1% as of the end of March. The total net liquidity injections between February and May have topped $50 billion.
According to Moody’s Investors Services, liquidity in China’s banking system is adequate.
But what about the bond market? The chief concern is that tighter liquidity conditions could spark higher funding costs and impact the economic recovery. As a result, industry observers think the PBoC will cut the reserve requirement ratio (RRR) again in the coming weeks, which would be the fourth time this year. It is unclear the near-term future because there was a significant increase in debt sales last month, forcing banks to search for cash to cover their funding gap in June.
On the data front, retail sales fell at an annualized rate of 2.8% in May, industrial production climbed 4.4%, and year-to-date fixed asset investment tumbled 6.3%.
The USD/CNY currency pair dipped 0.02% to 7.0856, from an opening of 7.0871, at 16:02 GMT on Wednesday. The EUR/CNY dropped 0.43% to 7.9490, from an opening of 7.9817.