The balance of Chinese central bank medium-term lending facilities (MLF) tapped a record high at the end of September, just prior to its announcement of a fourth targeted cut to the required reserve ratio for 2018.
The People’s Bank of China (PBOC) announced on 7 October that it would cut the required reserve ratio for the fourth time this year starting from 15 October, with a 100 basis point reduction for large-scale commercial banks, share-controlled commercial banks, municipal commercial banks and foreign-invested banks.
The cut will release approximately 1.2 trillion yuan in liquidity, of which 450 billion yuan will be used to swap out MLF, and the remaining 750 billion yuan to offset the impact of October tax payments.
The announcement arrived just after the US Fed unveiled a third interest rate hike for 2018 at the end of September, as well as amidst unabating trade tensions between China and the US.
Analysts have long said that the the Chinese central bank plans to use reserve ratio cuts in lieu of MLF as more effective means of adjusting medium and long-term liquidity, as well as one that imposes zero cost upon financial institutions.
Official data indicates, however, that the balance of outstanding MLF rose to a record high of 5.383 trillion yuan at the end of September, and will still remain at a historically high level of 4.9315 trillion yuan following scheduled maturations this month.
“There were already too many MLF in the market before,” said Wu Qing (吴庆), chief economist with China Orient Asset Management, to 21st Century Business Herald.
“There were so many that collateral was lacking, so a reduction in the reserve ratio is a move that the market has long predicted.”
Wu said that the upcoming reserve ratio cut isn’t for the purpose of injecting liquidity as much as achieving a structural adjustment and reducing the volume of outstanding MLF.
A reduction in the MLF balance will also put PBOC in a better position to use the instruments for timely fine-tuning of market liquidity whenever funds become scarce.
Analysts from China International Capital Corporation (CICC) point out that the use of reserve cuts in lieu of MLF and re-lending instruments will achieve a “structural rebalancing,” reducing the various costs involved with such methods.
Over the past two years MLF have emerged as a key monetary policy tool for PBOC, and a primary means of liquidity injection.
This has led to continuous expansion in in the MLF balance, which stood at 665.8 billion yuan at the end of 2015, before rising to 3.4573 trillion yuan by the end of 2016 and 4.5215 trillion yuan at the end of 2017.
A public announcement from PBOC made on the afternoon of 8 October indicates that it engaged in 441.5 billion yuan in MLF operations in September alone, with maturities of one year and a rate of 3.3%.
PBOC’s use of re-lending instruments also hit a record high last month, with the deployment of 47.47 billion yuan in short-term lending facilities (SLF), including 200 million yuan in overnight SLF, 13.45 billion yuan in 7 day SLF, and 34 billion yuan in one month SLF.
As of the end of September the SLF balance was 47.45 billion yuan, with PBOC stating that the instruments helped to satisfy the provisional liquidity needs of financial institutions and contain the interest rates corridor.
September also saw China’s three policy banks make net injections of 12.5 billion yuan via pledged supplementary lending facilities (PSL), which brought the outstanding balance to 3.2371 trillion yuan by the end of the month.