The People’s Bank of China has sought to stabilise long horizon liquidity expectations with a one day injection via medium-term lending facilities exceeding the amount set to mature across the full month of July.
On 13 July PBOC injected 360 billion yuan liquidity by means of one year MLF at 3.20%, for a volume slightly ahead of the 357.5 billion yuan in MLF scheduled to mature in July overall.
The one-year MLF rate of 3.2% was well below the SHIBOR one year rate of 4.4074% on the same day, enabling China’s commercial banks to take long-term money for much less than prevailing interbank levels.
The previous trading day saw the maturation of 60 billion yuan in repo agreements and 179.5 billion in MLF, while data from Wind Information indicates that a further 39.5 billion and 138.5 billion in MLF are set to mature on 18 July and 24 July respectively.
According to He Jinjin, research analyst with Industrial Bank, PBOC’s timing of the liquidity injection to coincide with the maturation of the preceding round of MLF marks a break from the precedent of the past several months.
“Prior to this in April and May, at the time of the maturation of the first round of MLF the central bank did not pursue a prompt continuation on the same day, allow market expectations to turn negative, capital fluctuations to increase and interest rates to rise,” said He to Shanghai Securities Journal.
“Starting in June, the central bank has focused more on stabilising market expectations, continuing MLF at a greater amount upon the maturation of the preceding round, to ensure cross-seasonal capital stability.”
The terms and rates for MLF have also shifted since June, prior to which the provision of facilities with both six month and one year maturities was the norm.
The maturities for MLF’s in June and July have all been for a full year, with PBOC using comparatively long-term funds to offset the maturation of shorter term funds,
Domestic analysts believe this is an indication that PBOC plans to strengthen long-term rate guidance and gradually increase long-term rates, in order to achieve a gentle deleveraging while maintaining sufficient liquidity.
According to He Jinjin, PBOC will use gradually lengthen fund terms when rates are relatively low, and use short-term operations to stabilise funds when they are comparatively high, in order to achieve its policy “cutting the peaks and filling the valleys.”
In its 2017 first quarter monetary policy execution report, PBOC said that it would focus on one-year MLF in future, supplementing them with facilities of other maturities when necessary in order to better serve the medium-to-long term liquidity needs of financial institutions.