Continued Shrinkage of MLF Indicates Ample Liquidity

On December 25, the People's Bank of China (PBOC) announced the implementation of a 1-year Medium-term Lending Facility (MLF) operation, injecting a total of 300 billion yuan into the market at a steady rate of 2.00%, unchanged from the previous monthThis operation comes as 1.45 trillion yuan of MLF loans are set to mature this month, making the current operation a case of "reduced-scale renewal." Understanding the implications of this reduced-scale renewal is crucial, as it draws attention to the overall liquidity situation in the marketTo gain deeper insights, Economic Daily reporters reached out to industry experts.

According to Zhou Maohua, a researcher at the Financial Department of China Everbright Bank, the reduced-scale renewal of MLF reflects a phase of abundant market liquidity, with a continued relaxed funding environmentHe elaborated that this year, the PBOC has refined its monetary policy framework by implementing interest rate bidding for MLF operations, with the operation volume predetermined by the central bank

The decision to inject only 300 billion yuan indicates that the PBOC views current market liquidity as sufficient, reducing the urgency for large-scale funding injections.

Market interest rates further corroborate this assessmentIn December, the overnight interbank rates have consistently remained below 1.5%. Additionally, the interest rates for 1-year interbank certificates issued by major state-owned banks have fallen below 1.7%. This ample supply of funds across various maturities has created a moderately relaxed liquidity environment, which is expected to facilitate stability as the year-end approaches, particularly during the Spring Festival period.

This year, the PBOC has continually diversified its liquidity injection mechanisms, utilizing a broader array of tools to alleviate pressure on MLF renewalsAccording to Wen Bin, chief economist at China Minsheng Bank, the central bank has introduced debt buying and reverse repos as operational tools to help manage the significant MLF maturities concentrated in the fourth quarter, therefore ensuring abundant market liquidity

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In October and November, the PBOC executed net withdrawals through MLF operations of 89 billion and 550 billion yuan, respectivelyHowever, net annual funding injections have been accomplished through government bond transactions and reverse reposSources within financial institutions have indicated that December operations are expected to involve substantial use of these tools, ensuring that overall operation volumes will significantly exceed MLF maturity amounts, further sustaining adequate market liquidity.

In general, industry experts advocate that the introduction of new tools to replace MLF bears numerous positive implicationsFirstly, it is beneficial in lowering funding costs, and secondly, it effectively alleviates the pressure on banks regarding their net interest marginsHistorically, the PBOC has typically intensified MLF operations as the year draws to a close as a means of supplying liquidity to the market

However, this year deviates from traditionIn supplementing long-term funding through reserve requirement ratio (RRR) reductions, the PBOC has increasingly relied on reverse repos of shorter tenor, particularly 7-day reverse reposThese options represent a shift from previous practices, offering shorter terms and comparatively lower rates.

Zhou Maohua highlights the multifaceted benefits of this operational modelOn one hand, it adequately satisfies the funding needs of various financial institutions during the year-end period, allowing them to maintain smooth operations without worries of capital shortagesOn the other hand, this approach effectively reduces the cost of liabilities for these institutions, easing the cost pressures in funding operationsMoreover, it synergizes with initiatives aimed at addressing manual violations concerning interest rate subsidies and promoting self-discipline among interbank demand deposits, creating a coherent policy framework

The comprehensive impact of such policy measures is not to be underestimated; it not only stabilizes banks' net interest margins at reasonable levels but also promotes their sound operation and healthy developmentUltimately, this fosters positive spillover effects to the real economy, enhancing credit conditions for corporations and households, and creating a favorable financial environment conducive to high-quality economic growth.

The MLF winning rate of 2.00%, unchanged from the previous month, has elicited thoughts from industry expertsThey believe that, under the new monetary policy framework, the MLF operation has become more market-oriented, and accordingly, the winning rate no longer bears the significance of prior policy implicationsZhou, again, points out that since the latter half of this year, MLF operations have shifted to market-driven interest rate bidding, prompting participating institutions to refer to 1-year interbank certificate rates for their bids

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