PBOC gives the market another liquidity present – Rabobank

By FXStreet FXStreet (Bali) – Michael Every, Head of Financial Markets Research, Asia-Pacific, at Rabobank, review the decision by the PBOC to cut lending rates for loans under the standing lending facility (SLF).

Key Quotes

“The BOJ opted not to ease yesterday, leaving a gap in the market, so the PBOC eased instead: after all, someone had to give the market another liquidity present.”

“After the close, the 7-day Standing Lending Facility (SLF) rate for loans to SMEs was slashed from 5.5% to 3.25% and the overnight SLF rate from 4.5% to 2.75%. The PBOC stated this is to create a “market-based interest rate corridor”.”

“However, given it already has a deposit rate (1.50%) and lending rate (4.35%), as well as reserve requirement ratios (17.50%) as policy tools, and is very open to intervening in a very muscular manner when needed, it’s not clear exactly how the new “market-based” system will actually work.”

“What we can see is rates in China are heading in one direction – down – even as they are ostensibly liberalised.”

“Indeed, a Bloomberg story today states that in 2015 USD1.2 trillion (or around 12% of China’s GDP) will have been borrowed just to cover interest payments on debt. Is it any wonder that …read more

Source:: FX Street