China central bank pledges policy support as risks to growth rise

China's central bank pledged on Thursday to maintain modest policy support to help the world's second-largest economy weather increasing headwinds in the near term but stressed that it will not flood markets with cash. Yet at the same time, the central bank also said publicly for the first time that it had pumped 769.5 billion yuan ($125.91 billion) worth of three-month loans into banks via a "medium-term lending facility" (MLF) to keep interest rates low.
The disbursement of loans was slightly more than the 700 billion yuan expected by many in the market and underscored the risks faced by China's economy, where third-quarter growth fell to a low not seen since the 2008/09 global financial crisis. "During the process of economic adjustment, China will see rising downward pressure in its economy and increasing chances of exposure to potential risks in a certain period of time," the People's Bank of China said.
It promised to stick to its "prudent" stance, fine-tune policy in a timely manner to support the economy, and maintain appropriate liquidity conditions to keep reasonable growth in credit and social financing. Indeed, to protect a wobbly economy from any painful rises in borrowing cost, the central bank said the 769.5 billion yuan worth of loans that were extended to banks in September and October were issued at an interest rate of 3.5 percent.
That is higher than the 2.6 percent that banks pay to savers for three-month deposits, but well below the 5.6 percent that banks charge for loans that mature in six months or less. "The funds provide liquidity and at the same time, they guide commercial banks in lowering interest rates and the cost of financing, thereby supporting the real economy," the central bank said.
Recipients of the loans included big state banks, city banks and rural commercial banks, it said. Alluding to an outflow of capital from China, the central bank said the growth in China's base money had moderated as the supply of dollars slowed. As such, it said the MLF had plugged a gap in liquidity. This is the first time that the central bank has talked about the MLF, despite rumours in the market last month that it had been used as a policy tool.
To keep liquidity conditions stable, the central bank created the "standard lending facility" - or SLF - last year that involves extending to banks loans that mature in between one to three months. Sources had said in September and October that the central bank had lent a total of 700 billion yuan worth of three-month loans to banks in the two months, ostensibly under the SLF, to keep the credit supply ample.