September 9, 2019 / 5:03 AM / 10 days ago

UPDATE 2-China Sept rate cut bets still intact despite no MLF rollover

(Adds market reaction, more analysts’ quotes)

SHANGHAI, Sept 9 (Reuters) - China’s central bank surprised markets by not rolling over medium-term loans on Monday, signalling Beijing is keen to avoid flooding the financial system with liquidity even as authorities take steps to boost bank lending to prop-up a slowing economy.

Traders had expected the People’s Bank of China (PBOC) to issue one-year medium-term lending facility (MLF) loans at a lower rate, as a batch of 176.5 billion yuan ($24.77 billion) worth of MLF loans were due to mature on the day.

But while the PBOC said it didn’t conduct MLF operations, market participants and analysts still expect the central bank will cut the MLF rate in coming weeks to support economic growth. Such a reduction could lead to a lower loan prime rate (LPR), the nation’s new benchmark lending rate.

“It’s quite unexpected,” said Tang Jianwei, economist at Bank of Communications, who had forecast a cut in MLF rate citing growing downward pressure on China’s economy.

“I’m not quite sure about a rate cut (for MLF) now ... the central bank may not want to send signal of too aggressive monetary easing,” he said.

On Friday, China’s central bank announced it would cut the reserve requirement ratio (RRR) for the third time this year, releasing 900 billion yuan ($126.35 billion) in liquidity to shore up the flagging economy. However, it also reiterated it will avoid flood-like stimulus as authorities worry about adding to a mountain of debt they have spent years trying to trim.

Xu Wenyu, analyst at Huatai Futures, said the central bank might be concerned of being seen as too aggressive in its easing.

“The central bank may want to observe whether its easings can be transmitted smoothly. If the economy stabilizes in the third, or fourth quarter, there’s no need for too much easing.”

Still, many analysts are betting on the PBOC cutting the MLF rate later this month to help lower lending rates, especially as the Federal Reserve is widely expected to cut interest rates at next week’s meeting. So far, the RRR cuts have had a big impact on money market rates but have failed to significantly push down corporate lending rates.

Standard Chartered China Economist Shen Lan forecast two MLF rate cuts - 10 basis points each- by the end of this year.

The MLF rate - largely seen as banks’ funding cost via the interbank market - is now the guidance rate for China’s new lending benchmark, the LPR. Lower MLFs could translate to lower borrowing costs across the broader economy.

Chinese stocks rose modestly on Monday, having rebounded roughly 8% over the past month on expectations of further policy easings, and on news Washington and Beijing have resumed trade negotiations. The Chinese yuan currency dipped against the dollar, and has lost roughly 3.5% since end-July as trade frictions festered.

Analysts say China’s economic growth has likely cooled further this quarter from a near 30-year low of 6.2% in April-June. While the PBOC has injected generous amounts of liquidity, weakening business and consumer confidence have weighed on activity from manufacturing and investment to retail sales.

Shao Yu, chief economist at Orient Securities, said pumping money into the economy has its limits, as “otherwise, Zimbabwe would have already become the world’s wealthiest nation.” ($1 = 7.1255 Chinese yuan renminbi) (Reporting by Samuel Shen, Kevin Yao and John Ruwitch; Editing by Shri Navaratnam)

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