PBoC provides funds via TLF to some commercial banks, may raise interbank yuan funding costs in coming months

The People’s Bank of China on Friday stated that it gave funds over CNY 100 billion via a temporary liquidity facility to certain huge commercial banks for 28 days to assist in easing seasonal liquidity tightness prior to the week-long Chinese New Year holiday. The new lending facility would have a funding cost around the same as the 28-day reverse repo rate, which is at 2.55 percent now. Moreover, the central bank also injected a net CNY 1.19 trillion of liquidity to the financial system through its daily open market operations last week, noted Scotiabank in a research report.

Following the headlines, onshore IRS rate dropped, while offshore CNH pared its gains. But the PBoC is quite likely to clean up the liquidity injected after the festival as was seen last year, and hence it is better to remain wary on both onshore and offshore yuan liquidity conditions, stated Scotiabank.

In the upcoming months, the PBoC is expected to increase interbank yuan funding costs, especially in offshore market, if required to control one-way speculation in the yuan depreciation. In the meantime, the central bank is likely to keep medium and long term funding costs affordable to boost the economy via unconventional monetary policy tools such as PSL and MLF.

Meanwhile, China is likely to continue to encourage capital inflows. According to a local media report, the central bank issued new guidance on cross-border financing by China’s firms. It would ease offshore borrowing and double offshore borrowing quotas for certain firms, aimed at countering China’s capital outflow partially.

“China is expected to prioritize stability ahead of a twice-a-decade leadership reshuffle at the 19th National Congress of the Communist Party of China scheduled for November 2017. Moreover, the uncertainty surrounding the Trump administration will complicate the PBoC’s policy choices”, added Scotiabank.