Liquidity Conditions Eyed

The PBOC will conduct MLF operations today with market consensus for CNY 770bn of injections – this would result in a net injection of around CNY 230bn when expiring securities are factored in.

• There are some CNY 300b yuan of MLF mature today and CNY 240.5b of TMLF mature on Jan. 25.
• There is some speculation around a smaller injection, which would concur with market expectations that the PBOC will gradually start to tighten monetary conditions as policymakers address concerns over leverage in the financial system.
• The PBOC has conducted unusually small open market operations this week, this is being interpreted as a gesture to the market that the central bank stands to supply more credit only if needed, according to the China Securities Journal.
• The central bank's normal starting amount of injection is CNY10bn, and so far China's money market is well supplied with liquidity, the Journal said. However, liquidity may tighten in the days before the February Lunar New Year due to tax payments, maturing MLF and higher cash demand, according to the official securities newspaper.
• The PBOC added CNY 550bn of one-year funding to the banking system in a surprise move during the closing weeks of 2020, which helped avoid a funding crunch that was also exerting effects on the government debt market.
• This saw overnight repo rates pushed to record lows and sparked a rush to borrow that pushed turnover in overnight repos to a 7-month high. Overnight repo rates are now off lows