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July 14, 2017

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China’s central bank moves to keep liquidity stable

CHINA’S central bank yesterday announced lending worth 360 billion yuan (US53 billion) via the medium-term lending facility to keep liquidity stable.

The loans will mature in one year with an interest rate of 3.2 percent, according to the People’s Bank of China ,

The MLF was first introduced in 2014 to help commercial and policy banks maintain liquidity by allowing them to borrow from the central bank by using securities as collateral.

The central bank suspended operations via reverse repos yesterday, after pumping 70 billion yuan into the banking system through reverse repos the previous day.

It was the first net injection since June 19, which sent a clear signal on maintaining stable liquidity and dispelled concerns about monetary tightening.

The central bank has increasingly relied on open-market operations for liquidity, rather than cuts in interest rates or reserve requirement ratios to maintain prudent monetary policy.

In addition to the MLF, standing lending facilities and pledged supplementary lending were also used in previous months.

Altogether 280 billion yuan of reverse repos and 179.5 billion yuan of medium-term lending facility loans are due to mature this week.

The PBOC’s open market operations are closely watched by the market, as they have become major tools for the central bank in pursuing prudent and neutral monetary policy.

Such a policy stance is crucial for China as it has to juggle the task of financial deleveraging, aimed at defusing risk and curbing asset bubbles, while shoring up a slowing economy.

As a result of deleveraging policies, growth of China’s broad measure of money supply M2 slowed down in June from 9.6 percent growth recorded a month ago.

The M2 growth target this year is about 12 percent, one point lower than the 2016 target. Authorities have been careful not to hurt liquidity, to avoid turbulence and pressure on the real economy.


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