It’s a big day coming up in China – economic data and the monthly rate setting (MLF)

The backdrop to the data due today and the monthly Medium-term Lending Facility (MLF) rates setting are the twin moves from the People’s Bank of China on Thursday:

The PBoC set the MLF rate on the 15th each month.

The PBOC’s MLF rate is a benchmark interest rate that banks in China can use to borrow funds from the People’s Bank of China for a period of 6 months to 1 year, medium-term liquidity to commercial banks.

The interest rate on the MLF loans is typically higher than the benchmark lending rate (more on these below), which encourages banks to use the facility only when they face a shortage of funds.

The MLF rate sets the scene for the monthly Loan Prime Rate (LPR) setting on the 20th.

Current LPR rates are:

  • 3.45% for the one year
  • 4.20% for the five year

MLF loans are secured by collateral, which can be a wide range of assets including bonds, stocks, and other financial instruments. The collateral ensures that the PBOC can recover the funds if the borrower defaults on the loan.

The MLF has already been cut twice since June. Last month it was cut from 2.65% to 2.5%. At the same time the 7-day reverse repo rate was cut, to 1.8% from prior 1.9%. The cut to the MLF paved the way from an LPR cut last month, the 1-year was trimmed to 3.45% from 3.55% while the 5-year remained unchanged.

Lower rates in China were a factor in the further slide for the yuan, but the PBoC has significantly stepped up its intervention since. Each days its been leading on the reference rate to drive stem the losses for the CNY (and in turn CNH). Its also had state-owned banks intervene in spot FX to buy CNY .

The MLF rate is expected to remain unchanged today. 400bn yuan of maturing MLF loans will be rolled over.

Offshore yuan has been held (relatively) stable the past month:

This article was written by Eamonn Sheridan at Source