Surprise injection comes hours after Trump threatens more tariffs

China's central bank on Tuesday lent 200 billion yuan ($31 billion) to financial institutions via its medium-term lending facility (MLF), highlighting concerns over liquidity and potential economic drag from a trade war with the US.

Photo: VCG

The surprise injection of funds came just hours after US President Donald Trump escalated the tit-for-tat trade scrap with China by threatening to impose a 10 percent tariff on $200 billion of Chinese goods.

No MLF loans were maturing on Tuesday, whereas recent operations had come on days when MLFs were due.

The move also comes after the central bank's unexpected decision to leave borrowing costs for interbank loans unchanged after the US Federal Reserve raised its policy rate. 

Analysts had forecast that the People's Bank of China (PBC), the country's central bank, would follow the Fed and increase rates modestly - as it has tended to do - to keep the spread between Chinese and US yields stable.

The interest rate for the one-year MLF was 3.30 percent, the PBC announced in a statement Tuesday.

The cash injection was to "make up for [the] mid- to long-term liquidity gap in the banking system" to counter factors including tax payments, government bonds issuance and maturing reverse repos, according to the PBC statement.

David Qu, market economist at ANZ Bank in Shanghai, said the central bank was indeed facing some pressure on the liquidity front from rising corporate financing costs, suspended bond issuance and credit defaults.

"The central bank is responding to those pressures," he said.

"The MLF issuance today could also be aimed at easing the concerns financial markets had over the China-US trade war."

The PBC said in the same statement that it injected another 100 billion yuan via reverse repos on Tuesday morning. Fifty billion yuan worth of reverse repos was set to expire on the same day.

The PBC last injected funds via MLFs on June 6, lending 463 billion yuan to financial institutions as 259.5 billion yuan worth of MLF loans became due.