TMTPost -- China’s central bank lowered the medium-term lending facility (MLF) interest rate to reduce financing cost, a further step to shore up the economy following a stimulus package.

Credit：Xinhua News Agency

The People's Bank of China (PBOC) on Wednesday pumped RMB300 billion (US$42.73 billion) into the market through the MLF to maintain reasonable and ample liquidity in the banking system, according to a statement by the central bank that day. The MLF operation had a maturity of one year with an interest rate of 2%, 30 basis points (BPs) lower than the previous level. Upon completion of the operation, the outstanding balance of the MLF stood at RMB6.878 trillion.

The MLF tool was introduced in 2014 to help commercial and policy banks maintain liquidity by allowing them to borrow from the central bank using securities as collateral.

The latest move on MLF loan rate came a day after the PBOC announced its biggest stimulus since the Covid-19 pandemic. China would cut the reserve requirement ratio (RRR) by a half percentage points, or 50 BPs, in the near future, providing about RMB 1 trillion in long-term liquidity to the financial market, said Pan Gongsheng, governor of the PBOC, at a press conference Tuesday. Depending on the liquidity situation in the market, RRR may be further lowered by 25 to 50 BPs within the year, Pan said. The central bank will also reduce the interest rate of seven-day reverse repurchases from 1.7% to 1.5%, according to Pan.   

The reduction was aimed at guiding the loan prime rate and deposit rate to move downward and maintaining stability in the net interest margin of commercial banks, said Pan.

Pan also announced China’s biggest package yet to bosst its property market. He said China will lower mortgage rates on existing home loans to a level similar to those of newly issued housing loans. The average reduction in mortgage rates for existing home loans is expected to be around 50 BPs, he said. 

"The new policy, which is conducive to further reducing borrowers' mortgage interest expenses, is expected to benefit 50 million households, or a population of 150 million," said Pan. This move is expected to reduce the total interest expenses for households by approximately RMB150 billion per year on average, which will help boost consumption and investment, Pan added.

Moreover, the central bank will create new monetary policy tools to support the stable development of the stock market, said Pan. The central bank will establish a swap program for securities, funds and insurance companies to obtain liquidity from the central bank through asset collateralization. The program will significantly enhance companies' ability to acquire funds and increase their stock holdings, Pan said. The central bank will also create a special re-lending facility to guide banks to provide loans to listed companies and their major shareholders for buybacks and increasing shareholdings, he said.

China is expected to unveil more stimulus in the coming months as the PBOC said the domestic RRR has dropped to 6.6% following the latest adjustment, which still provide some room to the central bank for further cuts compared with major overseas counterparts.