Medium-term lending (MLF) facilities have emerged as a “key channel” for the People’s Bank of China’s open market operations, with the Chinese central bank using the instruments to add nearly 1 trillion yuan to the country’s money supply from January to November.
Data released by PBOC via its official website on 1 December indicate that it undertook 404 billion yuan in MLF operations in November, for a total MLF balance of 4.42 trillion yuan as of the end of the month, and an increase of 963.2 billion yuan compared to the end of 2016.
PBOC engaged in 46.8 billion yuan in pledged supplementary lending (PSL) transactions in November, for a total balance of 2.62 trillion yuan as of the end of November, and an increase of 569.1 billion yuan compared to the end of last year.
PSL and MLF were first launched in April and September of 2014 respectively, in order to expand the range of monetary policy instruments at PBOC’s disposal.
The instruments saw a rapid increase in their outstanding balances in 2016, with a 419% surge for MLF and a 90% rise for PSL.
A recent report from Moody’s hailed PBOC’s use of longer tenor instruments to adjust the money supply, on the grounds that they enable the Chinese central bank to maintain the general trend of monetary policy without adversely impacting market expectations.
“Given their longer tenors, the medium-term lending facility and pledged supplementary lending allow the BOC, as the country’s central bank, to communicate a longer term view on its liquidity provision, which increases predictability for market participants, including the banks,” said Moody’s Assistant Vice President and Analyst Yulia Wan.
“The development is in line with a visible decline in interbank repo rate volatility since mid-2017, when the central bank made a clear shift to the one-year MLF from three or six months.”
PBOC flagged continued use of the instruments in its “2017 Third Quarter Monetary Policy Implementation Report” (2017年第三季度货币政策执行报告), referring to MLF as “key channels” for the base money supply.
PBOC said that it would “engage in MLF operations when appropriate each month based on the liquidity demand circumstances of financial institutions, in order to expedite stable economic growth and ensure the base money supply.
“[MLF] supplement medium and long-term liquidity gaps in the banking system, becoming a key channel for the central bank’s money supply.”
“Fundamentally speaking, this is a shift in methods for the release of base money,” said Wen Bin (温彬), chief researcher with China Minsheng Bank to 21st Century Business Herald.
“For more than 10 years they’ve mainly relied upon expansion in funds outstanding for foreign exchange, the central bank raising the reserve ratio and the creation and issuance of central bank notes to withdraw money.
“However, current circumstances are moving in the opposite direction, with a contraction in funds outstanding for foreign exchange, and the central bank needing to release liquidity via reductions in the reserve ratio and new types of monetary policy tools.”