The Chinese government avoided lowering interest rates at the last meeting of the year, and has withdrawn the largest amount of liquidity from the system that has been seen in a decade, to have the ability to inject stimulus next year in case start a trade war. The People’s Bank of China (the country’s central bank) thus maintains rates at 2%, and withdraws $158 billion from the financial system, the highest amount seen since 2014.
Beijing is trying to rotate the approach to stimulus, giving more weight to fiscal policy over monetary policy in the final months of the year. However, looking ahead to next year, the country’s authorities are anticipating an increase in stimuli, with the intention of alleviating the negative impact that a trade conflict with the United States may have.
The liquidity drain that the central bank is carrying out can be partially compensated by other types of tools that it uses to maintain liquidity in the system. Last month it injected 1 trillion yuan through repo agreements and the purchase of government bonds.
The market is now pricing in China to aggressively cut interest rates next year, a development that has driven bond yields to record lows in the last month.
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