China limits bank liquidity to hold rates

China is facing economic challenges characterized by abundant liquidity and weak credit demand, with the effectiveness of monetary policy in stimulating growth diminishing. The People's Bank of China has issued instructions to major banks to tighten controls on interbank lending to maintain the benchmark interest rate, amid a shift of funds toward government bonds rather than financing productive activities. This has raised concerns about the formation of financial bubbles, particularly in the sovereign debt market. The developments have highlighted the difficulty in rebalancing the Chinese economy, which is struggling with a declining real estate sector, rising energy prices, and deteriorating domestic demand, all while bond yields continue to fall and expectations grow that interest rates will not be cut in the near future.

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