(Feb 3): China has let the interest rate on a one-year policy loan to banks drop to a record low, according to people familiar with the situation, lowering funding costs so as to revive economic growth.
The People’s Bank of China charged some lenders on its medium-term lending facility, or MLF, at as low as 1.5% in January, down from 1.55% in December, said the people who requested anonymity discussing private matters. This compares with its last official rate of 2% a year ago, before the PBOC stopped publishing the figure after unveiling a new method for pricing the loan.
It isn’t clear how much of the 900 billion yuan MLF loans the central bank lent out in January were struck at the lowest rate. The central bank rolled out the liquidity management tool in 2014.
The PBOC didn’t immediately respond to a faxed request for comment.
The decline in the borrowing cost is another example of Chinese authorities’ drip-feed, low-key approach to revitalising a fragile economy, after refraining from cutting the policy rate for the last nine months and unleashing any big-bang stimulus. While the PBOC has expanded its toolkit to downplay the MLF’s role in liquidity management since late 2024, the one-year lending facility remains popular among some banks.
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The PBOC adopted a new method for pricing the MLF in March, allowing banks to bid for and pay at different rates on the loans in a fixed amount each month. Without a single rate, the shift will better meet financial institutions’ diversified needs, the central bank said at that time. It has since stopped releasing any MLF rate.
Since then, the PBOC has moved to prioritise its seven-day reverse repurchase agreements as its primary policy tool for liquidity management. The new benchmark rate has fallen 10 basis points to 1.4% after the fresh MLF pricing mechanism was introduced.
While the cheaper PBOC loans bode well for an economy still mired in deflationary pressures and a prolonged property slump, they would also benefit commercial lenders that have suffered from narrower interest margins in recent years. The margins are showing signs of stabilising, creating space for reducing the policy rate, PBOC’s Deputy Governor Zou Lan said last month.
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The drop in the MLF rate last month also coincided with the PBOC’s injection of a record offering of longer-dated funds into the financial system, including three-month and six-month outright reverse repos and the MLF.
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