China central bank surprises with no October TMLF loans despite weak data

SHANGHAI (Reuters) - China’s central bank on Thursday confounded market expectations that it would issue targeted medium-term loans in October, adding to uncertainty over how policymakers plan to stabilize the economy as growth nears 30-year lows.

FILE PHOTO: Headquarters of the People's Bank of China (PBOC), the central bank, is pictured in Beijing, China September 28, 2018. REUTERS/Jason Lee

Analysts agree more stimulus is needed to get activity back on track and shore up business confidence, but a recent jump on consumer inflation and concerns about rising debt risks are believed to be making authorities wary of taking more aggressive action.

The People’s Bank of China (PBOC) said in a statement on Thursday that it had skipped open market operations for a fourth straight day, citing “reasonably ample” liquidity in the banking system.

The statement made no mention of the targeted medium-term lending facility (TMLF), a liquidity tool that the central bank has used at regular quarterly intervals since January. Based on the timing of previous operations and statements from central bank officials, market players widely expected TMLF loans to be issued in late October.

TMLF loans are intended to directly target struggling areas of the economy. They differ from more sweeping, system-wide cash infusions used over the past year.

But skipping TMLF operations in October “may send the wrong signal to the market that (the PBOC is) really conservative in terms of monetary policy,” said Tommy Xie, head of Greater China research at OCBC Bank in Singapore.

“The Loan Prime Rate fixing this month shows that the room for credit (spreads) to narrow further is limited,” Xie said.

Earlier this month, China kept its new benchmark lending rate unchanged, surprising many who had expected the third cut in a row after economic growth slowed to 6.0% in the third quarter, the weakest pace since 1992.

Some market watchers believe monetary easing has been constrained by quickening consumer inflation. Consumer prices rose 3% from a year earlier in September, the fastest increase in nearly six years.

The acceleration has been largely driven by surging food prices, however, particularly for pork. Core inflation has been relatively benign.

Other market watchers speculate fresh policy moves may be awaiting developments in Sino-U.S. trade talks and a closed-door meeting of top Communist Party officials to map out priorities for the year ahead. The meeting ends on Thursday.

Conflicting signals of higher inflation and slowing growth have sent the total number of open long and short contracts for China’s benchmark 10-year treasury futures soaring to record highs, indicating sharp disagreement in the market over the prospects for imminent easing.


Serena Zhou, a desk economist at Mizuho Securities in Hong Kong, said that little progress has been made in lowering bank lending rates even after the PBOC’s rate reforms announced a few months ago.

“Blocked monetary policy transmission, partly due to financing difficulties for small local banks, can be hardly addressed by a medium-term lending facility (MLF) rate cut or the PBOC’s routine liquidity operations,” Zhou said.

She said another bank reserve requirement ratio (RRR) cut, which would free up more funds for lending, was a better option, particularly after China posted weak manufacturing data on Thursday.

Factory activity in China shrank for the sixth straight month in October and by more than expected, while the key services sector showed a marked loss of momentum, pointing to growing pressure on the economy.

OCBC’s Xie also said another RRR cut is possible in December. The PBOC has cut it seven times since early 2018.

At the same time, some investors are not yet ruling out more targeted medium-term liquidity injections soon, despite the lack of action in October.

A Hong Kong-based portfolio manager said that the TMLF operations could still be conducted in early November. “Today is the last day of the (plenum). Bosses need to finish debating and to know what to do next,” he said.

Reporting by Winni Zhou and Andrew Galbraith; Editing by Shri Navaratnam & Kim Coghill