China Absorbs Liquidity by Holding Rates Steady… Strategy to Brace for US-China Trade Tensions

Chinese authorities are withdrawing the largest amount of liquidity since 2014. This move is interpreted as a preparation for the potential escalation of US-China trade conflicts next year.

According to a Bloomberg report on the 26th, the People's Bank of China (PBOC) announced that it would hold the rate of the 1-year Medium-Term Lending Facility (MLF) at 2.0% per annum. Through the MLF, the PBOC has withdrawn a net 1.15 trillion yuan (approximately 230 trillion won) from the financial system, marking the largest scale since 2014.

The MLF is a policy tool used by the PBOC to adjust market liquidity, alongside the 7-day Reverse Repo. The People's Bank adjusts the Loan Prime Rate (LPR), which effectively serves as a benchmark rate, through the MLF. Recently, the PBOC has focused on the 7-day Reverse Repo rate to guide market borrowing costs, rather than considering the MLF as the main policy rate. The 7-day rate has been maintained since a 20 basis point (bp) cut at the end of September.

Ming Ming, chief economist at Zhongxin Securities, stated, "The MLF rate freeze was an expected outcome," and projected, "There is a possibility of a 40-50bp rate cut in 2025." He added, "This liquidity withdrawal has increased the likelihood of a reduction in the bank reserve requirement ratio (RRR), and related measures may be announced by the end of the year."

Earlier this month, Chinese authorities promised to support the economy through appropriately eased monetary policy and proactive fiscal policy, but specific stimulus measures have yet to be announced. It is analyzed that they are maintaining a cautious stance as President-elect Donald Trump has hinted at the possibility of imposing tariffs.

In the Chinese market, there is an expectation that a large-scale rate cut will be implemented next year. In line with this outlook, Chinese government bond yields have hit record lows. The yield on 10-year government bonds fell by 1bp to 1.73% per annum, approaching a historic low.

Hyein Lee, hey@hankyung.com