(Bloomberg) --
The People’s Bank of China will likely roll over only part of the targeted funds due on Friday while letting the rest mature, as a flurry of central-bank credit tools have kept liquidity ample to support the virus-weakened economy.
China’s central bank is expected to inject funding via the targeted medium-term loans into the banking system as 267.4 billion yuan ($37.8 billion) of the debt comes due. Analysts expect the one-year funding to be offered at a lower rate than the 3.15% of the last operation in January.
Reducing the cost for the targeted medium-term lending facility would put it back into line with other monetary tools, as China’s first economic contraction in decades prompted a series of interest rate cuts by the PBOC. Policy makers have rolled out a wide-ranging response to cushion the economy and bolster investor confidence. Lockdowns to contain the coronavirus are set to result in the country’s slowest annual economic growth since the 1970s.
“The TMLF is likely to be rolled over with a corresponding cut in the rate. Otherwise, the market will be disappointed,” said Frances Cheung, head of Asia macro strategy at Westpac Banking Corp. in Singapore. But she added the tool’s role of providing cheap funding is “becoming less of a priority, with various measures pressuring down funding costs already.”
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Created in 2019, the TMLF has been used by the central bank to channel liquidity to specific parts of the economy while avoiding a flood of money in the interbank markets. That mindset, however, has changed drastically since the virus outbreak called for much-broader monetary easing.
The PBOC’s relending and rediscounting tools are “more attractive to many of the small banks” now as they offer funding at cheaper levels than the TMLF has, according to Xing Zhaopeng, a market economist at ANZ Bank China Co. in Shanghai. He said even if the TMLF interest rate is lowered to around 2.8%, the amount of loans offered Friday will be less than those maturing because of lack of demand.
There might also be a possibility the PBOC doesn’t offer any fresh TMLF loans Friday, some analysts say, deeming the need for additional liquidity small.
The yield on 10-year sovereign bonds hit 2.48% on April 8, the lowest since 2002, and other key tenors have been at their lowest in more than a decade.
For investors, the interest rate on the medium-term lending facility -- which was cut last week to 2.95% -- is actually more important to watch than the TMLF’s because the former is China’s de-facto policy rate, said Becky Liu, head of China macro strategy at Standard Chartered (LON:STAN) Bank Ltd. in Hong Kong.
Still, she said Friday’s announcement is worth watching in order to gauge the future role of the TMLF. “It will either fade out gradually or remain as a tool to provide discounted funding compared with the MLF.”
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