China Central Bank To Inject Liquid Funds To Support The Economy

China's central bank will inject more liquidity when rolling over maturing medium-term policy loans for the fourth consecutive month on Wednesday, while keeping the interest rate unchanged, to support the economy.

The People's Bank of China (PBOC) will continue to maintain sufficient long-term funds, traders and analysts said, adding that the modest economic growth target for this year indicates policymakers are content with the pace of recovery.

In December, China ended a three-year-long zero-COVID policy that included city-wide lockdowns and extensive quarantine. The reopening of the economy has increased consumption and business activity, raising the prospect of a faster recovery and decreasing the likelihood of massive monetary easing.

In a poll of 28 market observers conducted this week, all participants predicted that the PBOC would maintain the one-year medium-term lending facility (MLF) interest rate at 2.75 percent.

Among them, 20%, or 71%, expected the central bank to inject new funds to exceed the amount maturing, while the remaining eight traders and analysts predicted a full rollover. This month, a total of 200 billion yuan ($29.10 billion) of such debt matures.

"An outsized MLF rollover of 300 to 400 billion yuan is probably needed as market liquidity demand shall stay high on still heavy negotiable certificate of deposit (NCD) refunding needs and ongoing local government bond (LGB) supply," said Frances Cheung, rates strategist at OCBC Bank.

At the annual session of the National People's Congress, China set the target for economic growth this year at around 5%. (NPC). The target was at the low end of expectations, as policymakers had recently told reporters that a range of up to 6% could be set. It is also lower than last year's target of around 5.5%.

"The policy signals from the PBOC and the NPC point to a reduced likelihood of an MLF rate cut this year," said Tommy Wu, senior China economist at Commerzbank.

"This is because policymakers probably expect a relatively good start for the economy this year and less policy support is warranted. This is particularly given the conservative and modest 'around 5 per cent' target for 2023."

Some investors also noted that China's monetary policy should remain stable following Beijing's surprise decision to keep its central bank governor and finance minister in their positions, prioritising continuity as domestic and international economic challenges loom.

The MLF rate serves as a guide to the loan prime rate (LPR), and markets generally use the medium-term policy rate as a forerunner to changes in lending benchmarks. The LPRs' monthly fixing is due next Monday.