Chinese Central Bank Steps up Liquidity via Medium-term Lending Facilities in December

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The People’s Bank of China (PBOC) has made a sizeable injection of liquidity into the Chinese financial system via mid-range open market operations in December.

On 15 December, PBOC announced that it would undertake 650 billion yuan in medium-term lending facility (MLF) operations that day, well ahead of the 500 billion yuan in instruments set to mature.

The interest rates for its MLF remained unchanged compared to the preceding round of open market operations, at 2.75%.

The move marks a turnaround from November, when the volume outstanding MLF contracted, as well as October, when the outstanding balance remained the same. In both August and September PBOC let maturing MLF exceed fresh injections made via the instruments.

Ming Ming (明明), chief economist with CITIC Securities, said to state-owned media that there are three main considerations behind PBOC’s net injection of liquidity via MLF in December:

  1. Dealing with end-of-year increases in the demand for liquidity.
  2. Recent pressure on the liabilities side of bank balance sheets, with increases in interest rates for certificates of deposit.
  3. Volatility in the market for bank wealth management products and credit bonds.

Domestic observers point out that PBOC is also expanding the supply of medium-and-long term liquidity in December via pledged supplementary loans (PSL) and re-loan instruments, in order to stabilise market expectations and smooth out liquidity levels as the end of the year of approaches.

While the rate for PBOC’s MLF has remained unchanged, domestic observers point to room for China’s 5-year benchmark loan prime rate (LPR) to decline, with a potential drop of 15 basis points this month.