(Bloomberg) -- China caught traders off-guard with a surprise injection into the financial system via loans to banks, ahead of data on Friday which is expected to show a further slowdown in the domestic economy.
The People's Bank of China added 200 billion yuan ($28 billion) of one-year cash through the medium-term lending facility on Wednesday. It kept the interest rate steady. The move took traders by surprise as the authorities usually inject liquidity when previously offered loans come due, and the next batch won't mature until Nov. 5.
The Chinese economy has been under pressure amid a prolonged trade dispute with the U.S. and a slowing domestic economy, prompting the central bank to ease monetary policy by lowering corporate borrowing costs and cutting banks' reserve ratios this year. Data released this week showed that China's factory deflation deepened and imports and exports fell last month.
"It's not expected by the market," said Becky Liu, head of China macro strategy at Standard Chartered Plc., referring to the cash injection. "They probably want to inject more long-term liquidity" to ensure ample supply during the tax payment season in mid-October and to support the economy, which is still facing growth pressure, she said.
China is scheduled to release gross domestic product data for the third quarter on Friday. It's expected to have grown at 6.1% from a year ago, which would be the slowest pace since at least 1992.
More than 400 billion yuan of MLF will come due early next month, providing a window for the PBOC to lower interest rates and inject more liquidity into the financial system. The central bank may cut the cost on the loans by 10 basis points to 3.2% by the end of this year, according to the median forecast in a Bloomberg survey conducted late last month.
"Market reaction is muted, however, probably as the rate is kept unchanged" while other central banks are cutting interest rates, according to Frances Cheung, head of Asia macro strategy at Westpac Banking Corp.
The yield on China's 10-year government bonds was little changed at 3.17% as of 4:51 p.m. in Shanghai.
(Updates bond yield in final paragraph)
--With assistance from Livia Yap.
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