PBoC Set To Drain Some Medium-Term Liquidity

The PBoC will conduct its latest round of 1-Year MLF operations later today.

• CNY600bn of existing MLF funds are set to mature today, with the BBG median looking for CNY400bn of funds to be added in today’s operation, which would result in a net liquidity withdrawal of CNY200bn.
• The range of estimated gross liquidity injections, based on the BBG survey, sits between CNY100-600bn, i.e. somewhere between a net withdrawal of CNY500bn of liquidity to a net neutral situation. CNY600bn is the modal estimate, with 4 of the 12 surveyed looking for such an outcome.
• A reminder that several Chinese press outlets have flagged the potential for a net liquidity withdrawal in today’s operations.
• Liquidity hasn’t been meaningfully channelled into lending, with banks seemingly pursuing the purchases of government bonds and credit products of highly rated companies, which could tip the PBoC into the previously outlined net drain of liquidity.
• Furthermore, the DR007 rate (closing at 1.35% on Friday) has plummeted to levels well below the 7-day reverse repo rate (2.10%), with the gap between the two threatening monetary policy transmission, in addition to signalling a more than adequate liquidity backdrop for Chinese banks and growing worry re: a potential liquidity trap. It is also worth noting that the PBoC was clearly cognisant of short-term inflationary pressures in its latest monetary policy report, as well as pledging to not “over-issue” money and has already pulled back when it comes to the size of its daily OMOs (with little sign of demand for an increase in short-term liquidity provisions).
• Still, the PBoC will be mindful of the size of any tweaks to net liquidity, as it will not want to spook the market/provide mixed messages when it comes to its monetary stance.
• Looking forwards, the combination of the PBoC’s worries re: inflation and the lack of desire on the part of banks when it comes to making loans limits the prospects of further broad monetary easing in China, at least in the short-term. Most expect any such easing to come in a targeted manner if delivered in the coming months.