After China slashed the 7-day reverse repo rate late last month, it was just a matter of time before the PBoC delivered a cut to the medium-term lending (MLF) rate.
The country’s multi-tiered rates regime can be daunting for the uninitiated, but the (very) short version goes as follows.
In August, China unveiled a “revamped” loan prime rate (LPR), which, from that point forward, served as the de facto benchmark, antiquating the old, “official” lending rate. LPR is priced off MLF, so you really need to cut the latter before you cut the former, although theoretically, LPR can fall even during a month when MLF rates are unchanged. The monthly LPR print comes on the 20th of each month.
China completed the last round of easing on February 20, slashing both LPR tenors (there’s a one- and a five-year), with the one-year cut by 10bps to match an identical cut to the MLF rate and OMO rates (the 7- and 14-day repo rates) earlier that month.
Although LPR was held steady last month, on March 29 China delivered a 20bps cut to the 7-day repo rate, tipping Beijing’s intent to cut LPR this month. On Wednesday, the PBoC laid the groundwork further, offering 100 billion yuan in one-year MLF at 2.95%, down from 3.15%.
As Bloomberg’s Wes Goodman notes, there seems to be a sense of urgency with Wednesday’s cut. “First, the China Securities Journal reported the MLF cut may come on Friday, then Reuters sources suggested the move would happen as soon as today”, he writes, adding that the next MLF maturity “doesn’t happen until Friday, adding a level of seriousness to today’s reduction”.
Of course, China reports Q1 GDP on Friday, which is expected to show an unprecedented contraction. And the LPR print is due on Monday. So, it’s possible the PBoC wanted to get the cut out of the way now, roll half of the 200 billion in MLF that matures later this week, and then either roll the remaining 100 billion on Friday, offer more or, alternatively, offer less, for a net drain.
In any event, this comes on the same day that the first stage of the latest RRR cut for rural and small city commercial banks (announced on April 3) goes into effect. That cut – 100bps – is being implemented in two steps, the first today, and then a second tiered reduction on May 15. Today’s reduction released around 200 billion in funding.
Wednesday’s MLF cut comes 24 hours after Beijing reported better-than-expected trade data for March, when exports shrank just 6.6%, less than half of the decline seen by economists, and imports barely fell compared to the 10% plunge consensus was looking for.
Earlier this month, credit data for April showed China’s stimulus efforts are paying off. Total social financing last month was 5.15 trillion yuan, a full 2 trillion ahead of estimates and the highest monthly total on record.
