China boosts liquidity, set for more policy easing as trade war threatens economy

SHANGHAI: Chinese policymakers are pumping more liquidity into the financial system and channelling credit to small and medium-sized firms, and Beijing looks set to further loosen monetary conditions to mitigate threats to growth from a heated Sino-US trade war.

The world’s second-biggest economy has already started to lose momentum this year as a government campaign to reduce a dangerous build-up of debt has lifted borrowing costs, hitting factory output, business investment and the property sector.

As an intensifying trade conflict raises risks to exporters and overall growth, many economists expect the central bank to further reduce reserve requirements in the coming months – on top of the three reductions made so far this year.

However, few see a cut in the benchmark policy rate this year, as authorities walk a fine line between keeping liquidity conditions supportive and preventing any destabilising capital outflows that could put the skids on a fragile yuan currency.

On Wednesday, a source with direct knowledge of the matter said the People’s Bank of China (PBOC) plans to introduce incentives that will boost the liquidity of commercial banks.

These are aimed at encouraging banks to expand lending and increase their investment in bonds issued by corporates and other entities, such as local government financing vehicles (LGFVs).

The PBOC has also been ensuring ample liquidity by allowing commercial banks to tap its Medium-Term Loan Facility (MLF), especially lenders that have invested in bonds rated AA+ and below, the source said.

The improved cash conditions have been reflected in reduced short-term borrowing costs for banks, with the country’s key seven-day money rate at 2.6409 per cent on Thursday, 37 basis points lower than recent highs at the end of June.

The combination of lower interbank rates and the push to boost bank support should help to ease financing pressures for weaker firms, analysts said.

“This should spell good news for lower-grade bond markets which have been suffering from a flight to quality-grade bonds, and some firms have subsequently found access to liquidity difficult,” analysts at Everbright Sun Hung Kai said in a note. — Reuters