The People’s Bank of China (PBoC) cut its one-year medium-term lending facility (MLF) rate by 20 basis points (bp) to 2.3% from 2.5% on July 25, a move unforeseen by the market.

This cut, the largest MLF rate cut by the PBoC since April 2020, was unexpected because usually such a move would be made on the 15th of a month. The rate cut injected 200 billion yuan (US$27.6 billion) of liquidity into the market to stimulate the economy.

Following the conclusion of the third plenum of the Chinese Communist party’s central committee last week, a series of moves have been adopted to lift economic vitality and maintain the activity necessary to meet the national annual growth target set in the 5% range. Official data released recently shows China’s economic growth reached 4.7% for the second quarter, which is below expectation.

These moves include, on the monetary side, the PBoC’s 10bp cut of its seven-day reverse repo rate from 1.8% to 1.7% on July 22 and its 10bp cut of its one- and five-year loan prime rates to 3.35% and 3.85%, respectively, on the same day. With this MLF adjustment, four of the central bank’s commonly-used key policy rate indicators, corresponding respectively to the short-, mid- and long-term financing guiding instruments, have all lowered.

Additionally, on the fiscal side, the ministry of finance has announced the issuance of a 55-billion-yuan, 30-year central government bond on July 24. Including this, the ministry has issued 363 billion yuan of ultra-long-duration national bonds in total this year.

China’s lower-for-longer interest rate trend will remain intact, according to a BNP Paribas report, and another 10bp cut is expected in Q4 2024, with several more such small cuts in 2025. As well, the issuance pace of central and local government bonds, the report predicts, will step up further in Q3 2024; and, if growth remains sluggish in Q3, fresh central government bond quotas may be approved in Q4.