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China’s Central Bank Leaves Key Rate Unchanged

The People’s Bank of China has decided to leave the key interest rate unchanged.

China's Central Bank Leaves Key Rate Unchanged

The financial regulator of the Asian country has left the mentioned indicator stable for the tenth month in a row. The Central Bank of China is demonstrating a high level of caution in its approach to monetary policy easing. In this case, the financial regulator of the Asian country focuses on factors such as an abundance of liquidity and pressure aimed at preventing further weakening of the yuan.

The People’s Bank of China has kept the one-year interest rate on loans at the same level of 2.5%. The financial regulator made the corresponding decision on Monday, June 17. In this case, the so-called medium-term lending facility is meant. It is worth noting that the decision made on Monday by officials of the People’s Bank of China fully meets the preliminary expectations of experts and analysts who were interviewed by media representatives.

The Asian country’s financial regulator has withdrawn a net 55 billion yuan ($7.6 billion) from the banking system. This decision was made to avoid excessive liquidity.

The position of the People’s Bank of China regarding the key interest rate indicates that Beijing is making a choice in favor of the stability of the national currency, having the opportunity to lower the cost of borrowing. It is worth noting that the relevant decision of the Asian country’s financial regulator was taken at a time when the world’s second-largest economy is demonstrating what can be described as a very uneven recovery process after several difficult years associated with restrictive measures aimed at combating coronavirus. It is also important that the mentioned measures have slowed down and actually stopped some business and production processes. The coronavirus pandemic has also become a kind of disruption factor in the global supply chain, in which China is one of the most significant players.

The very restrained actions of the financial authorities of the Asian country, as reported by the media, may cause a significant weakening of the market’s hopes for easing the monetary policy of this state in the short term. With a high degree of probability, the realization of this potential scenario will cause the yield of Chinese bonds to continue to remain at a level that is very close to the indicator corresponding to a ten-year low.

Lynn Song, greater China chief economist at ING Bank, says that cutting the interest rate would be the right decision to support the Asian country’s economic system at the current stage of its existence. The expert mentioned weak credit data in this context. Lynn Song also says that the People’s Bank of China refrains from deciding on monetary policy easing, which involves cutting the interest rate, due to the priority of the strategy, which defines the stability of the national currency at a reasonable and balanced level as a more important goal.

It is worth noting that recently there has been an increase in the number of supporters of lowering the cost of borrowing in the Asian country. The decision of the People’s Bank of China, adopted on Monday, indicates that the financial regulator continues to make efforts to preserve the yuan as a powerful currency, despite the tendency to spread the mentioned opinion. Last week, the yuan’s onshore exchange rate fell to its lowest level since November. This situation is the result of a significant interest rate gap between the Asian country and the United States.

Sufficient market liquidity has so far kept the Chinese authorities from any interference in the currently implemented monetary policy strategy, which is also determined by the priorities of Beijing as a political center. The rate on one-year AAA-rated negotiable certificates of deposits dropped to around 2%, compared with the medium-term lending facility’s 2.5%. The inflow of funds from savings to wealth management products and other high-yield assets in the form of cash pumps into the financial system of an Asian country.

Becky Liu, head of China’s macro strategy at Standard Chartered Bank, says that the liquidity drainage underscores the lack of demand for the more expensive shorter-term loans belonging to the category of the medium-term lending facility.

Chinese state media on Monday published articles noting that the Asian country’s financial regulator, before making and then implementing a decision on cutting interest rates, will need to take into account the interest margin of local lenders, currently on a downward trajectory, and the yuan exchange rate.

Currently, the world’s second-largest economy is showing uneven, but still ongoing recovery. In May, factory activity growth slowed in China, but at the same time, retail spending rose above the preliminary expectations of experts interviewed by the media regarding the dynamic of this indicator.

The downturn in the Asian country’s real estate sector is also continuing. The mentioned state of affairs so far shows no signs of an imminent end and does not signal the prospects for at least a slight improvement.

Serhii Mikhailov

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Serhii’s track record of study and work spans six years at the Faculty of Philology and eight years in the media, during which he has developed a deep understanding of various aspects of the industry and honed his writing skills; his areas of expertise include fintech, payments, cryptocurrency, and financial services, and he is constantly keeping a close eye on the latest developments and innovations in these fields, as he believes that they will have a significant impact on the future direction of the economy as a whole.