The People’s Bank of China maintained the rate on its one-year policy loans — called the medium-term lending facility — at 2.5%, contrary to widespread expectations among economists that it would make its first trim to the rate since August. It also offered 995 billion yuan ($139 billion) through the MLF, resulting in a 216 billion yuan net injection that will boost liquidity and help meet funding demand.

“The MLF non-cut this morning does suggest there’s not a lot of urgency in terms of adding more stimulus,” said Frederic Neumann, chief Asia economist at HSBC Holdings Plc., in an interview on Bloomberg TV.

One big factor: The Federal Reserve. Still-stubborn inflation in the US has led to uncertainty over when the Fed will start reducing its interest rates. After December consumer prices came in a bit hotter than expected, Fed Bank of Cleveland President Loretta Mester said March was “probably too early” for a rate decline. 

“Chinese policymakers here are signaling essentially that, look, we are not quite clear that the Fed’s going to cut rates soon, so maybe we’re going to hold off,” Neumann said, pointing out that there is still a big interest rate differential between the two economies. “You don’t want to cut too rapidly in China, and so you might want to use liquidity injections and other types of credit easing tools rather than an outright rate cut at this point in time.”

Economists cited a slew of other considerations for the central bank that may have held it back from cutting rates, including concerns over the yuan’s strength and the potential for a rate cut to create volatility. Banks are also experiencing record-low net interest margins, meaning they may need more time to reduce their funding costs before being able to absorb the impact of lower borrowing rates.

China’s stocks opened lower Monday. The CSI 300 Index, a benchmark of onshore shares, fell as much as 0.5% in early trading. The offshore yuan rose 0.1% to 7.1834, having recently slipped amid bets for more easing. The yield on China’s 10-year government bonds was steady at 2.52%.

Recent economic data out of China has raised concerns about the recovery’s momentum, leading investors and analysts to heighten their expectations for more policy easing. 

The country marked its longest deflationary streak since 2009 in December, figures released Friday showed. Exports fell annually last year for the first time since 2016 due to weak global demand. Financing and loan growth last month missed expectations. Weak domestic demand, a prolonged property crisis and the sluggish job market remain major overhangs this year. 

What Bloomberg Economics Says … 

“The People’s Bank of China’s surprise hold on its one-year interest rate doesn’t change our view that it will guide borrowing costs down further soon.

“An economy that is losing momentum — weighed down by a housing rout and deflation — needs more support. We continue to expect the central bank to cut its key rate by 10 basis points and the reserve requirement ratio by 25 bps this quarter.”

— David Qu, economist

Read the full report here.

“In light of the weak data, a cut would probably have undermined the yuan and led to unwanted currency weakness,” said Robert Carnell, regional head of research for Asia Pacific at ING Groep NV. “I think the authorities are quite constrained with what they can do, and so I’m neither disappointed or surprised, but I am resigned to this being another difficult year.”

Several economists don’t think cutting policy rates would solve the demand and confidence problems, though, even if such actions are able to ease some financing pressures in the short term. 

That’s led to focus on other tools as its disposal that that help ensure ample market liquidity. The PBOC may, for example, cut the reserve requirement ratio, or the amount of cash banks must hold in reserve — especially after a senior central bank official mentioned that ratio in an interview with state media last week. 

While not as aggressive a move as a policy rate cut, reducing the RRR would unleash money into the financial system, thereby helping banks buy government bonds that would be issued to finance infrastructure spending.

The central bank also took several fairly aggressive steps in December to support the economy, short of a rate cut. It rolled out a record 800 billion yuan via the MLF to lenders and injected more cash into the banking system. The PBOC also provided 350 billion yuan worth of low-cost funds into policy-oriented banks in the month to finance housing and infrastructure projects. 

Once the Fed does start cutting rates, though, the room for rate trims in China will open up.

“A turn of the Fed’s policy stance will soon bring an end to the PBOC’s painful period of monetary policy divergence with all major central banks in the world,” said Becky Liu, head of China macro strategy at Standard Chartered Plc. “A dovish turn of the Fed will offer more room for the PBOC to ease in 2024, to better reflect China’s economic and inflation fundamentals.”

–With assistance from Zhu Lin, Wenjin Lv, Ishika Mookerjee, Shikhar Balwani, Shulun Huang and Qizi Sun.

(Updates with market reaction, context, analysis.)

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