Stability in China's Monetary Policies

(Bloomberg) -- China’s central bank is poised to keep cash conditions and monetary policy broadly stable as policymakers focus on a weakening currency.

The People’s Bank of China will leave the rate on its one-year policy loans — called the medium-term lending facility — steady at 2.5% as soon as Sunday, according to the median estimate in a Bloomberg survey of analysts. Most of the analysts see either a small increase in the MLF issuance, or little changed from the loans maturing this month. Some 499 billion yuan ($69.4 billion) worth of loans are due to expire.

The PBOC is expected to hold its liquidity operations on the first working day after the Lunar New Year holiday ends, which would be Sunday.

While calls are mounting for Chinese authorities to do more for the economy as consumer prices fall at the fastest pace since 2009, concerns about yuan volatility have tied the PBOC’s hands. The central bank last month disappointed investors expecting the first cut in MLF since August. Policymakers later announced a bigger-than-expected reduction in the reserve requirement ratio for banks, one of the several measures to boost sentiment.

“It seems too rushed to cut MLF rates” barely two weeks after the RRR cut, said Becky Liu, head of China macro strategy at Standard Chartered Plc. “It may have limited impact in terms of lowering loan rates, but greater negative implication on yuan. The risk versus reward of a MLF cut now doesn’t seem attractive.”

Pressure on the Yuan and the Impact of Monetary Policies

China’s sluggish economy and diverging monetary policy from the US is heaping pressure on the local currency. The offshore yuan sank to a three-month low against the dollar Tuesday as traders pared bets of an early pivot by the Federal Reserve following stronger-than-expected inflation data.

Sentiment Worsens

Future Predictions and Challenges

Keeping the MLF steady for a sixth straight month may have its risks as sentiment worsens on weakening demand, property market turmoil and capital outflows. The situation might be dire enough for the central bank to lower the lending rate as early as possible, according to analysts at Everbright Securities Co. and Mizuho Securities Co.

“A cut can’t be ruled out but that’s not our base case,” said Michelle Lam, Greater China economist at Societe Generale SA. “The PBOC may wait for further evidence on growth slowdown.”

The data so far is giving a mixed picture on the signs of recovery. Loan growth in China fell to a record low last month, underscoring weak borrowing demand, whereas a private gauge of China’s factory activity expanded for a third month in January, contrasting with weakness in official data.

Policymakers have ramped up support in recent weeks amid a rout in the nation’s stock market, but more steps may be needed.

Read More: Xi Can’t Use 2015 Playbook to Calm China Markets, Investors Say

“MLF rate cut is still necessary but the timing could be later considering currency stability, while market continue to adjust their expectation of Fed rate cut,” says Xiaojia Zhi, head of research at Credit Agricole CIB. The “concern” is measures taken by China to support the economy may not be “aggressive enough to imminently turn around the market sentiment.”