PBOC lends US$72.4b to banks through 1-year MLF at flat rates
Print Edition
China’s central bank lent 463 billion yuan (US$72.43 billion) to financial institutions yesterday via its 1-year medium-term lending facility, with interest rates unchanged, it said in a statement.
The fund injection via MLF effectively rolled over 259.5 billion yuan worth of such loans maturing on the same day, as markets had expected.
It also added a net 203.5 billion yuan of liquidity, the People’s Bank of China said.
The move comes as more Chinese companies are concerned about tightening credit conditions, which are pushing up borrowing costs and leading to a gradual increase in corporate bond defaults.
Analysts believe the PBOC may be adjusting the way it conducts its various liquidity operations as financing conditions change, with yesterday’s move possibly pushing back the timing of another expected cut in banks’ reserve requirement ratios.
Markets have generally expected another RRR cut in the second half after a surprise reduction in April, with some speculation that it could come as early as June or July.
“Today’s China MLF operation reinforces our view for a delay in the next possible reserve requirement ratio cut,” Frances Cheung, head of Asia macro strategy at Westpac First, said.
Cheung noted 238.5 billion yuan of MLFs due in June was repaid with money from the RRR cut in April.
“Following this pattern, the RRR cut might have covered MLF up to August. Second, the PBOC more than rolled over the remaining 259.5 billion yuan maturing in June, suggesting the near-term strategy may be to cover liquidity needs via MLF.”
The PBOC cut the cash commercial banks must hold as reserves in April to help them repay their outstanding MLFs, describing it as a liquidity operation and not a signal of a monetary policy shift.
Yesterday’s injection was aimed to “keep liquidity reasonable and stable in the banking system, strengthen its support for small-and-micro companies, the green economy and other areas, and promote healthy development of credit bond market,” the PBOC said in the statement on its website.
The interest rate for the one-year MLF was flat at 3.30 percent.
After the operation, outstanding MLF loans will be raised by 203.5 billion yuan to 4.22 trillion yuan, according to the statement.
The MLF rollover was also the first since the PBOC expanded the guarantee scope of the bond instrument last Friday, by allowing banks to use suitably good collateral to ensure stable liquidity in its financial system.
ING economist Iris Pang said the move to expand collateral for MLFs also suggested the PBOC will be in no rush to cut RRR in June.
“Collateral expansion for MLF would reduce contagion risks and calm the market, however, we still expect standalone default cases, especially for companies with weak financials as financial deleveraging reform continues,” Pang wrote in a note earlier yesterday.
Pang cited a Securities Daily report that said seven issuers had defaulted on 22 bonds this year as of June 1.
“Though the number of issuers and default amount look small, default risk is rising in the onshore bond market.”
ING believes the PBOC will still raise money market rates in mid-June, following an expected policy rate hike by the US Federal Reserve.
But given that liquidity is tight, Pang said the PBOC’s move would be a modest five basis points.
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