(Yicai) Aug. 25 — The People’s Bank of China, the country’s central bank, is moderately withdrawing medium-term liquidity while ramping up short-term tools to offset month-end shortfalls.
The PBOC will conduct a one-year medium-term lending facility operation worth CNY500 billion (USD74.4 billion) through variable-rate tenders with a fixed quantity, using a multiple-price bidding on Aug. 25 to maintain adequate liquidity in the banking system, it said yesterday.
With CNY600 billion in MLF loans maturing in August, that represents a net reduction of CNY100 billion, the first in nearly four months. In July, the PBOC added a net CNY100 billion of liquidity into the market.
Notably, the CNY600 billion MLF loans maturing this week coincide with a peak in government bond payments, with net payments nearing CNY800 billion, the highest weekly reading since last year. Cross-month funding disruptions call for close attention.
The MLF volume cut should not be interpreted as a signal of monetary tightening, said Wang Qing, chief macroeconomic analyst at Golden Credit Rating International. The move largely corresponds to the maturity profile of financial institutions’ funding demand and does not herald tighter liquidity conditions, he noted.
The PBOC yesterday also announced that it will conduct overnight reverse repurchase operations at a fixed interest rate through quantity-based bidding between Aug. 27 and Sept. 1, with the maximum daily amount set at CNY600 billion, to better meet the banking system’s short-term liquidity needs.
In the eight trading days between Aug. 12 and 21, the PBOC recorded zero operations in its seven-day reverse repo agreements.
The absence of an injection through seven-day reverse repo operations reflects changes in active borrowing demand among financial institutions, said Dong Ximiao, chief economist at China Merchants Union Consumer Finance. This, coupled with the CNY1 trillion (USD148.7 billion) six-month outright reverse repos injected in mid-August, meant the PBOC saw no need for a full MLF rollover to boost liquidity.
The PBOC’s continuous overnight reverse repo operations will help control the volatility of DR001, Wang noted. DR001 is the overnight repo rate for depository institutions.
Analysts believe that the PBOC’s shift to reducing medium-term liquidity and boosting short-term liquidity is a refined approach against the backdrop of ample liquidity in the banking system yet mounting short-term structural pressures, in order to smooth out funding volatility caused by government bond payments and month-end assessments.
The PBOC’s liquidity management is shifting from aggregate easing to fine-tuned adjustments and maturity-structure optimization, Dong pointed out.
Looking ahead, Wang believes that overnight reverse repos could gradually replace seven-day reverse repos as the PBOC’s core instrument for short-term liquidity fine-tuning. In the longer run, this may pave the way for the overnight reverse repo rate to replace the seven-day reverse repo rate as the primary policy rate.
Editor: Futura Costaglione