China quietly cuts borrowing costs while keeping rates on hold

The People’s Bank of China (PBOC) has been quietly guiding interbank borrowing costs down without actually cutting official interest rates, with the latest move a record one-day injection of cash into the market.

The central bank pumped a net 560 billion yuan (US$83 billion) into the financial system on Wednesday, the biggest open market operation on record.

While that action was mostly aimed at addressing a funding shortage ahead of Lunar New Year, it also speaks to a policy priority for the PBOC – providing cheaper funding to banks to allow them to lend to companies at lower rates.

The strategy works by replacing funding accessed by banks via more expensive routes, such as the medium-term lending facility, for cheaper shorter-term cash or releasing more reserves previously locked up to a wider range of lenders.

The PBOC has taken a series of steps in recent weeks on that front.

It has cut the amount of cash banks need to put aside as reserves, expanded the eligibility of lenders for reserve ratios cuts, lowered funding costs via a targeted medium-term lending facility, and halted funding provided via the pricier medium-term lending facility