PBOC’s bold move: Injects $112 billion lifeline amid economic challenges

In a bid to fortify its economy facing challenges from a housing slump and subdued demand, China extended its support for the economy with the largest injection of medium-term policy loans, Bloomberg reported.

The People’s Bank of China (PBOC) provided commercial lenders with a substantial net amount of 800 billion yuan ($112 billion) in one-year loans while maintaining the existing interest rate. This injection surpassed analysts’ expectations, as revealed in a Bloomberg survey, doubling the anticipated amount and surpassing the previous month’s infusion.

The Chinese economy has grappled with difficulties throughout the year, with a slower-than-expected recovery from stringent Covid Zero policies and an exacerbating property crisis. Despite mixed data, with industrial production surpassing expectations but retail sales falling short in November, the nation remains cautious about its growth recovery.

The sustained support from the PBOC underscores Beijing’s commitment to maintaining ample liquidity. This comes after China made a rare move in October, raising the fiscal deficit ratio to a three-decade high and allowing the sale of an additional 1 trillion yuan in sovereign bonds within the year. Recent episodes of sudden cash tightness due to seasonal factors and debt issuance have unsettled investors in recent months.

“The large amount of MLF injection seems to suggest less chance of a reserve-requirement ratio cut in the near term, and it seems that the PBOC is probably still prioritizing foreign-exchange stability and refrains from pursuing aggressive stimulus,” said Michelle Lam, Greater China economist at Societe Generale SA. “However, with domestic demand still on a shaky ground, we think there will still be more RRR and interest rate cuts next year.”

On Friday, the PBOC injected 1.45 trillion yuan through its medium-term lending facility, exceeding the 650 billion yuan coming due in December. In addition to this, Chinese authorities relaxed homebuying restrictions in Beijing and Shanghai, extending efforts to counter an unprecedented housing downturn. Beijing reduced the down-payment ratio for second homes to 40% or 50%, depending on the property’s location, mirroring a similar move by Shanghai.

Traders have been engaged in prolonged debates over how the PBOC should ease its policy to stimulate growth. Some advocate for targeted tools like MLF injections, while others suggest a reduction in the reserve requirement to release cheaper and longer-term funding.

It is certain that fiscal stimulus will play a more significant role next year. In a recent meeting, China’s policymakers called for “appropriately stepped up” fiscal measures, coupled with “prudent” monetary policy. This resonated with a pro-growth stance from a recent Politburo meeting.

The market responded positively to the liquidity injections and additional support measures. China stocks experienced a surge, with those in Hong Kong leading gains in Asia. The Hang Seng China Enterprises Index recorded an increase of more than 3%, and the yuan recovered losses in onshore trading.

“Lack of confidence is still the key factor hindering growth, but a lower rate will help the economy,” said Serena Zhou, economist at Mizuho Securities. “I still look for 20-basis-point cuts to interest rates and 50-basis-point cuts to the RRR next year – the room for further monetary easing is relatively limited.”

(With Inputs from Bloomberg)