China's central bank is widely expected to leave a medium-term interest rate unchanged and drain some cash from the banking system when rolling over such maturing loans on Monday, a Reuters survey showed.
While the economy continues to sputter, a weak Chinese currency has remained the key constraint limiting Beijing's monetary easing efforts, as that could further widen the yield gap with other major economies, particularly the United States, and trigger more capital outflows.
In a Reuters poll of 35 market watchers conducted this week, 34, or 97%, of respondents expected the PBOC to keep the interest rate on the one-year medium-term lending facility (MLF) loan unchanged at 2.50% from the previous operation.
The lone outlier in the poll projected a marginal rate reduction.
Market participants believe the significance of the medium-term lending facility (MLF) rate will gradually diminish as the People's Bank of China (PBOC) tries improve the effectiveness of its interest rate corridor.
The PBOC introduced a new cash management mechanism this week and its Governor Pan Gongsheng said recently that the seven-day reverse repo rate "basically fulfils the function" of the main policy rate
"The importance of MLF rate may decline, with PBOC more focusing on buying or selling Chinese government bonds (CGB) around the reverse repo rate in the short tenor," said Ju Wang, head of Greater China FX & rates strategy at BNP Paribas.
The new liquidity mechanism should allow the seven-day reverse repo rate to move first, followed by other rates, including the MLF rate, said a bond fund manager.
Meanwhile, a vast majority of 28, or 80% of all participants in the poll predicted that the central bank would only conduct a partial rollover, compared with 103 billion yuan ($14.18 billion) worth of MLF loans due this month.
"Investors contemplate as to whether PBOC will only partially roll over MLF in the months ahead to gradually reduce the outstanding amount of the facility," said Frances Cheung, rates strategist at OCBC Bank.
Some bond traders also pointed out that demand for the MLF loans were hampered by signs of loosening cash conditions in the banking system.
The interest rate on one-year AAA-rated negotiable certificates of deposit (NCDs) , which measures short-term interbank borrowing costs, stayed well below the MLF rate. It last traded at 1.9642%.
Apart from the PBOC's effort to revamp its monetary policy transmission channel, it has sounded warnings and introduced a flurry of measures, including plans to sell treasury bonds, to cool a long-running bond rally.
"The PBOC may reduce the need to frequently adjust various monetary policy tools, such as one-year MLF, one-year and five-year loan prime rate (LPR), seven-day reverse repo, and reserve requirement ratio (RRR), which might ease upward pressure on the dollar-yuan pair," analysts at Societe Generale said in a note.
The monthly fixing of the LPR is due on July 22.
($1 = 7.2636 Chinese yuan)
