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Policy

【Financial Str. Release】Economic Watch: China's central bank cuts policy interest rates to bolster real economy

August 17, 2022


Abstract : China's central bank has leveraged its policy toolkit, cutting the interest rates of its medium-term lending facility (MLF) loans and reverse repos by 10 basis points for the second time this year, to further consolidate economic growth.

BEIJING, Aug. 16 (Xinhua) -- China's central bank has leveraged its policy toolkit, cutting the interest rates of its medium-term lending facility (MLF) loans and reverse repos by 10 basis points for the second time this year, to further consolidate economic growth.

Specifically, the People's Bank of China lowered the rate of 400 billion yuan (about 59 billion U.S. dollars) worth of one-year MLF to financial institutions to 2.75 percent from the 2.85-percent rate it opted for on the previous occasion.

It also injected 2 billion yuan of funds into the market via seven-day reverse repos at an interest rate of 2 percent, down from 2.1 percent.

The MLF tool was introduced in 2014 to help commercial and policy banks maintain liquidity by allowing them to borrow from the central bank using securities as collateral.

A reverse repo is a process in which the central bank purchases securities from commercial banks through bidding, with an agreement to sell them back in the future.

Analysts saw the move as the central bank's quick response to changes in economic and financial situations, which will further lower financing costs for the real economy, expand domestic demand, and consolidate the momentum of economic recovery.

The central bank's data showed that the M2, a broad measure of money supply that covers cash in circulation and all deposits, increased 12 percent year on year to 257.81 trillion yuan at the end of last month.

Newly added social financing, a measurement of funds that individuals and non-financial firms receive from the financial system, came in at 756.1 billion yuan last month, down 319.1 billion yuan from the same period last year.

The July data suggested that while money supply was sufficient, the financing demand from the real economy was still weak, said Zhou Maohua, an analyst with the China Everbright Bank.

Zhong Zhengsheng, chief economist with Pingan Securities, said lowering policy interest rates is the most direct way to drive down financing costs.

Zhong said more convenient financing for companies that contribute to the new drivers of the economy, as well as decreased financing costs, will be conducive to structural optimization and high-quality development of China's economy.

Chinese leadership emphasized at a high-profile meeting in late July that the monetary policy should help maintain a proper and adequate liquidity supply, increase credit support for enterprises, and make good use of new loans from policy banks, as well as their funding for infrastructure projects.

The China Banking and Insurance Regulatory Commission said Friday that more efforts will be made to provide more credit to the real economy, including infrastructure and manufacturing, and to improve services for new urban residents and bolster support for education, healthcare and elderly care.

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Keyword: MLF central bank Financial Str. Release

Reading:

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Economic Watch: Chinese economy's recovery momentum continues in July

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