The People’s Bank of China has just taken its net liquidity injections via medium-term lending facilities a four month high following the release of lacklustre economic data for last month.
On 15 August PBOC undertook 399.5 billion yuan in 1-year MLF operations at a rate of 3.2%, yet refrained from any repo operations.
Given that a total of 287.5 billion yuan in MLF are scheduled to mature this month, this translates into net injections of at least 112 billion yuan by means of MLF in August, for the highest level in four months.
The macroeconomic research team at Shanghai-based CIB Research said that the ample MLF liquidity injection was prompted by the release of economic data for July that fell short of consensus expectations, as well as to serve as a buffer for the maturation of 140 billion yuan in repo agreements on the same date.
However, the expiration of both 140 billion yuan in repo agreements and 287.5 billion yuan in MLF on the same day still translates in a net liquidity withdrawal of 28 billion yuan.
PBOC has also used open market operations to make withdrawals of 98 billion yuan over the past half month, on the grounds that liquidity remains at comparatively ample levels.
According to the central bank however the DR007 rate – which is the pledged 7-day repo rate in the inter bank market, remains at what it considers a rational level of 2.7% and is likely to continue declining.
This indicates that liquidity in the banking system isn’t as bad as market observers believe, and can accommodate a modest withdrawal of funds.
CIB Research says that the impact of a stronger yuan on funds outstanding for foreign exchange may have contributed to an increase in liquidity, while another factor may be easing economic growth and a slide in demand for bank loans.
According to CIB analysts PBOC open market operations continue to be run on a discretionary basis in response to market changes, and the net withdrawal of 28 billion yuan is not necessarily a signal of tightening liquidity.
In future PBOC will continue to fully buffer the impact of maturing open market instruments with further injections, or permit slight contractions in liquidity, and CIB sees August funds remains comparatively stable.