China's central bank ramped up liquidity support to the banking system as it rolled over medium-term policy loans on Monday, but kept the interest rate unchanged amid concerns about the risk of more sharp yuan declines.
The People's Bank of China (PBOC) is walking a tightrope between keeping liquidity ample to aid a struggling economy and stabilising the yuan amid expectations of "higher for longer" U.S. rates.
The PBOC said in a statement it conducted medium-term lending facility (MLF) operations worth 789 billion yuan ($107.96 billion) to keep liquidity in the banking system adequate.
With 500 billion yuan worth of MLF loans maturing, the PBOC is pumping 289 billion yuan of fresh liquidity into the banking system, the biggest such net injection in nearly three years.
Meanwhile, it held the rate on the one-year policy loans unchanged at 2.50%, in line with a Reuters poll last week.
Monday's operations shows "the PBOC hopes to provide liquidity to ease stress in the market," said Stone Zhou, director of Global Markets at UOB China.
This month, a slew of Chinese local governments, including Liaoning and Chongqing, are rushing to issue special refinancing bonds to repay outstanding liabilities, as Beijing steps up efforts to reduce growing debt risks that remain a worry for investors.
Analysts expect issuance of such bonds to hit at least 1 trillion yuan this year.
In addition, tax collections by the government in October will also likely cause liquidity stress, analysts said.
The PBOC has cut the MLF rate - a guide to China's benchmark lending rates - twice this year to lower borrowing costs in an economy hit by weak consumption and a deepening property crisis.
But further monetary easing could widen China's yield gap with the United States, putting fresh downward pressure on the yuan , which has lost roughly 5.5% against the dollar this year.
Xing Zhaopeng, senior China strategist at ANZ, said the PBOC's decision on Monday not to cut rates does not rule out a five basis point cut to 1-year lending benchmark rate on Friday.
"We believe the PBOC will maintain its easing pace at one measure per month."
Louise Loo, lead economist at Oxford Economics, also expects China's monetary policy to stay dovish in the near-term.
The economic advisory firm forecasts the PBOC will deliver a further round of 10 bp rate cuts in the fourth quarter, as well as another 25 bp cut to the reserve requirement ratio in December.
