August saw the People’s Bank of China (PBoC) maintaining the medium-term lending facility (MLF) rate at 2.3%, following a 20bp reduction in July. The central bank also withdrew a net CNY101 billion from the banking system through the MLF. The subdued demand for MLF loans from banks can be attributed to the fact that the MLF rate is higher than the average funding cost for interbank lending, currently around 2%.
Canada Imposes Tariffs on China
Delays in the MLF rate announcement have been observed, with the most recent one occurring on August 15. It was subsequently announced five business days after the release of loan prime rates (LPRs) on August 20. Speculation arises as to whether the PBoC will continue to delay the MLF rate announcement in September or establish a permanent date around the 25th of each month, downplaying the significance of the MLF rate.
Canada recently announced new tariffs on Chinese imports, including 100% on electric vehicles and 25% on steel and aluminum. These rates align with those imposed by the US earlier in the year and exceed the European Union’s tariffs on Chinese electric vehicles. Additionally, Canada has initiated a 30-day consultation period for other sectors such as batteries, semiconductors, solar products, and critical minerals.
On the foreign exchange front, USD/CNY saw a modest 10-pip increase above 7.12, while offshore USD/CNH gained 70 pips, also surpassing 7.12.
Analysis and Implications
The decision by the PBoC to maintain the MLF rate at 2.3% reflects stability in China’s monetary policy amid economic uncertainties. The withdrawal of funds from the banking system may impact liquidity but could also indicate a shift in the central bank’s strategy. Meanwhile, Canada’s tariffs on Chinese imports could lead to trade tensions and potentially affect global supply chains.
Investors should monitor these developments closely as they could have implications for financial markets and investment decisions. Understanding the dynamics of central bank policies and trade relations is essential for navigating volatile market conditions and making informed investment choices.