China central bank unexpectedly conducts medium-term loan operation, cuts interest rate

SHANGHAI (Reuters) -China’s central bank surprised markets for a second time this week by conducting an unscheduled lending operation at steeply lower rates, suggesting authorities are trying to provide heavier monetary stimulus to prop up the struggling economy.

The medium-term lending facility (MLF) operation comes after the central bank cut several benchmark lending rates on Monday, just days after a top leadership meeting, which had outlined other major reforms.

The People’s Bank of China (PBOC) issued 200 billion yuan ($27.5 billion) in one-year loans under its MLF at 2.30%, down 20 basis points from its previous MLF loan, the bank said in a statement.

It also injected 235.1 billion yuan into markets through seven-day reverse repos at 1.70%.

China’s stock markets reacted negatively to the news, taking the sudden urgency on the part of authorities to lend to mean the deflationary pressures and weakness in consumer demand are more severe than what is priced into assets. China reported weaker-than-expected GDP data earlier this month.

The China Enterprises index fell 1% and sovereign bond yields fell after the news of the MLF operation and rate cut. ($1 = 7.2625 yuan)