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China unexpectedly cuts 2 key rates, withdraws cash from bank operating system

SHANGHAI (Reuters) -Chinas central bank unexpectedly cut an integral interest for the next time this season and withdrew some money from the bank operating system on Monday, to attempt to revive credit demand to aid the COVID-hit economy.

Economists and analysts said they believe Chinese authorities are keen to aid the sluggish economy by allowing a widening policy divergence with other major economies which are raising interest levels aggressively.

The Peoples Bank of China (PBOC) said it had been lowering the rate on 400 billion yuan ($59.33 billion) of one-year medium-term lending facility (MLF) loans for some finance institutions by 10 basis points (bps) to 2.75%, from 2.85%.

In a poll of 32 market watchers the other day, all respondents had forecast the MLF rate will be left unchanged and 29 had predicted there will be a partial rollover.

The rate cut surprises us, said Xing Zhaopeng, senior China strategist at ANZ.

It must be a reply to the weak credit data on Friday. The federal government remains wary of growth and can not release.

New bank lending in China tumbled a lot more than expected in July while broad credit growth slowed, as fresh COVID flare-ups, worries about jobs and a deepening property crisis made companies and consumers cautious with dealing with more debt.

The PBOC attributed its proceed to keep bank operating system liquidity reasonably ample. Sufficient reason for 600 billion yuan worth of MLF loans maturing, the operation resulted a net 200 billion yuan of fund withdrawal.

Market participants have largely priced in the partial rollover because the banking system had been flush with cash, with interbank money rates hovering at two-year lows and persistently below policy rates.

Now with hindsight, todays 10-bp cut could be viewed as front-loading prior to the policy room gets narrower in the years ahead because the PBOC sees structural inflation pressure, said Frances Cheung, rates strategist at OCBC Bank.

The PBOC reiterated it could intensify the implementation of its prudent monetary policy and keep liquidity reasonably ample, while closely monitoring domestic and external inflation changes, it said in its second-quarter monetary policy report.

Regardless of the warning of inflation risk and flush liquidity condition, the dominating downside risks beneath the COVID spread and property-sector rout prompted the PBOC to cut rates to stimulate demand, said Ken Cheung, chief Asian FX strategist at Mizuho Bank.

Chinas 10-year treasury futures jumped a lot more than 0.7% in early trade following a rate decision, while yields on sovereign bond for exactly the same tenor fell about 5 basis points.

The central bank also injected 2 billion yuan through seven-day reverse repos while cutting the borrowing cost by exactly the same margin of 10 bps to 2.0% from 2.1%, in accordance with an online statement.

The PBOC lowered both rates by 10 bps in January.

($1 = 6.7425 Chinese yuan)

(Reporting by Winni Zhou and Brenda Goh; Editing by Kim Coghill and Neil Fullick)

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