China cuts one-year rate, withdraws cash from banking system

China’s central bank lowered the interest rate charged on its one-year policy loans while net withdrawing liquidity via the lending facility, as the monetary authority shifts toward a short-term tool in an overhaul of its policy framework.

The People’s Bank of China cut the rate of the medium-term lending facility to 2% from 2.3%, according to a statement on Wednesday. It also withdrew a net 291 billion yuan ($41.4 billion) via the MLF, the biggest drainage since December 2021.

The moves followed Governor Pan Gongsheng’s announcement the previous day for a decrease of 30 basis points at a rare briefing in Beijing, as part of a broad stimulus package to revive the world’s second-largest economy. The central bank chief also revealed a plan to unleash 1 trillion yuan in long-term liquidity with a 50-basis-point reduction of the reserve requirement ratio, the amount of cash lenders must keep in reserve.

The PBOC has been downplaying the role of the MLF as a key rate while transitioning to using seven-day reverse repurchase notes as the main policy lever. The outstanding MLF loans are widely expected to be gradually replaced by other tools like RRR cuts. The new policy framework allows the PBOC to influence market borrowing costs more effectively and aligns it with global practices.