(MENAFN) China's central bank has opted to keep its key one-year interest rate steady at 2.3 percent, following a reduction of 20 basis points in July. This decision comes alongside a significant net withdrawal of 101 billion yuan (approximately USD14 billion) from the banking system this month. This move follows the repayment of 401 billion yuan in loans on August 15. Bruce Pang, chief economist at Jones Lang LaSalle, noted that this net withdrawal indicates the central bank's aim to maintain balanced liquidity while avoiding excessive amounts that could fuel a bond market rally.

The central bank’s stance highlights Beijing’s cautious approach to economic support amid a rare contraction in bank loans due to weak demand. The People's Bank of China (PBOC) has been balancing the need to stimulate growth with the necessity of managing financial risks, particularly in the bond market. Recent measures include stress testing financial institutions on their bond investments to ensure they can withstand potential volatility if the bond rally reverses.

The decision to withdraw liquidity may also be influenced by the weak demand for loans, as evidenced by the lower cost of funding for AAA-rated commercial banks compared to medium-term lending rates. Economists suggest that the PBOC might further ease its policies by the end of the year, particularly as the Federal Reserve is anticipated to initiate its own rate-cutting cycle. Xiaojia Qi from Credit Agricole predicts that the central bank could lower the reserve requirement ratio by 25 to 50 basis points to address liquidity needs and manage the maturity of medium-term loans. Despite the current ample liquidity, banks could face tightening conditions in the coming months as loan maturities increase and government bond issuance accelerates. 

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