Maintaining its key policy rate steady, China's central bank has carried out its first liquidity tool cash withdrawal operation since November 2022. The move was made to preserve currency stability in the face of uncertainty around prospective interest rate increases by the Federal Reserve.
Over the past several years, the dollar has strengthened against the Chinese yuan due to the US Federal Reserve's substantial tightening of monetary policy. Yield differentials might widen if the Federal Reserve or other central banks decrease interest rates before China's scheduled policy meeting, which would put more pressure on the local currency.
The People’s Bank of China (PBOC) opted to retain the rate on 387 billion yuan ($53.80 billion) worth of one-year medium-term lending facility (MLF) loans to select financial institutions at 2.50 percent, consistent with the previous operation. As a result of this move, a net withdrawal of 94 billion yuan from the banking system ensued, given the expiration of 481 billion yuan worth of MLF loans slated for this month. This development signifies the first instance of cash withdrawal using the liquidity instrument since November 2022.
According to the People's Bank of China's (PBOC) web statement, the loan operation on Friday met the liquidity demands of financial institutions and kept the banking system's liquidity relatively sufficient. According to Xing Zhaopeng, a senior China strategist at ANZ, the decision to remove assets is in keeping with the objectives indicated in the government work report, which are to prevent funds from being idle. The chances of another policy rate decrease are modest because big commercial banks have not lowered deposit rates yet.
China has set an ambitious economic growth target of around 5 percent for 2024, pledging to undertake measures to reshape the country's development model and mitigate risks stemming from insolvent property developers and indebted local governments. PBOC Governor Pan Gongsheng recently affirmed the bank's commitment to maintaining the stability of the yuan and conveyed a dovish message to the market, emphasizing China's ample monetary policy tools.
