Central Bank MLF Injections Are Just Corrections, Not “Watering” of Money Supply


Analysts say murmurs that China’s deleveraging drive is coming to an end are misplaced, noting that the central bank’s recent injection of funds via medium-term facilities were “corrections,” as opposed to “watering” of the money supply.

The People’s Bank of China injected 498 billion yuan into the market via one year MLF’s with rates of 3.2% on 5 June, in a move which was interpreted by many domestic observers as “watering” of the money supply in response to a scarcity of funds which has left the Chinese capital markets hard hit.

Coming just after the first peak in the China Banking Regulatory Commission’s crackdown on lenders, the decision was interpreted by some analysts, such as Suning Financial’s Huang Zhilong, as a moderation of the coordinated deleveraging drive by Chinese regulators.

“Additionally tightening of monetary policy in the first quarter led to a continuous rise in rates on the market for funds, and the entire financial system faced a sharp increase in pressure,” said Huang. “Financial regulators will now advance using more moderate methods.”

Other analysts contend however that the central bank and China’s other financial regulators are intent on staying the course of deleveraging, irrespective of capital demand levels on the market.

“With no marked reduction in capital demand, whether or not capital [availability] will improve on June will be determined in the end by the central bank,” said Huang Wentao, analyst with CSC Financial, to the Economic Observer.

“At present the central bank is continuing to implement a stable, neutral monetary policy…overall fund rates are subject to upward pressure.”

“The current MLF’s operations did not exceed expectations, and were more the fulfilment of commitments,” said Huang.