While parts of China's economy are starting to show signs of improvement after a mid-year slump, the property market and exports continue to contract. However, markets believe sustained downward pressure on the yuan currency is limiting room for policymakers for more aggressive monetary easing.
China recently stepped up its fiscal stimulus with a newly approved 1 trillion yuan of sovereign bond issuance, at a time when the sputtering economic recovery also calls for more liquidity support, market watchers said.
All 31 market participants polled this week expected the People's Bank of China (PBOC) would inject fresh funds to exceed the maturing 850 billion yuan ($116.53 billion) worth of one-year medium-term lending facility (MLF) loans on Wednesday.
Among them, 28, or 90% of all respondents, predicted no change to the borrowing cost, which currently stands at 2.5%, while the remaining three projected a marginal interest rate cut.
"We do not expect the central bank to significantly cut policy rates, as most policymakers do not believe policy rates are the main reason for the current economic weakness," said Wang Tao, chief China economist at UBS.
"In addition, 'higher-for-longer' U.S. rates and the depreciation pressure on the yuan may also constrain the PBOC's policy rate cut," she said.
Still, Wang expects the central bank to cut the MLF rate by another 10 basis points (bps) and lower banks' reserve requirement ratio (RRR) by a further 25 bps before year-end in order to help smooth the impact of higher government bond issuance in coming months.
The interest rate on one-year AAA-rated negotiable certificates of deposit (NCDs), which measure short-term inter-bank borrowing costs, is hovering at a six-month high of 2.5698%, about 7 bps higher than the MLF rate the central bank charges financial institutions.
Pressured by China's surprising post-COVID tailspin and a stronger U.S. currency, the yuan has lost more than 5% to the dollar so far this year to become one of the worst performing Asian currencies. [CNY/]
The sizable depreciation has prompted authorities to step up efforts to support the currency, with many analysts believing policymakers may view yuan stability as a prerequisite for restoring confidence in yuan assets.
Still, some traders and analysts expect the central bank to imminently cut RRR and repay MLF loans.
"There were occasions in the past that PBOC covered MLF with a combination of RRR cut-released liquidity and MLF operations," said Frances Cheung, rates strategist at OCBC Bank.
"If there is no RRR cut, then we would be looking for an outsized MLF."
The PBOC is expected to make the MLF rollover announcement just before the release of October retail sales, industrial output and investment data at around 0200 GMT.
($1 = 7.2944 Chinese yuan renminbi)
(Reporting by Wu Fang and Winni Zhou in Shanghai, and Tom Westbrook in Singapore; Editing by Kim Coghill)
