Today, the central bank conducted a 500 billion yuan Medium-term Lending Facility (MLF) operation. Liquidity was loose in May, and the market expects MLF net injection to become a regular practice.

To maintain ample liquidity in the banking system today, the People's Bank of China (PBOC) conducted a 500 billion yuan Medium-term Lending Facility (MLF) operation with a one-year maturity. Given that 125 billion yuan of MLF was due to mature on May 15, the MLF operation in May will result in a net injection of 375 billion yuan.

Industry insiders told a Caixin reporter that the PBOC has increased the MLF operation volume for the third consecutive month, and for the second consecutive month by a significant amount. "The continued large-scale increase in MLF operations following the RRR cut in May indicates that quantitative policy tools are being continuously deployed. This will not only maintain ample liquidity in the banking system but also further enhance banks' credit lending capacity."

PBOC Increases MLF Operations to Ease Month-end Funding Volatility

Today, the PBOC conducted a 500 billion yuan MLF operation with a one-year maturity through a fixed-quantity, interest-rate tender with multiple winning bids. Considering that the RRR cut this month has already released trillion yuan of liquidity, why did the PBOC still implement a relatively large-scale increase in MLF operations?

In response, Wang Qing, chief macro analyst at Dongfang Jincheng, told a Caixin reporter that since April, external environmental volatility has intensified, and China has implemented extraordinary counter-cyclical adjustments. "The continued large-scale increase in MLF operations following the RRR cut in May indicates that quantitative policy tools are being continuously deployed. This will not only maintain ample liquidity in the banking system but also further enhance banks' credit lending capacity, better meeting the financing needs of enterprises and residents, and increasing the availability of credit financing for the real economy."

Today is also the first day of tax payment for this tax cycle. May is a major month for tax payments, and the government bonds have a net payment of 58.2 billion yuan. The market expects that the liquidity gap may temporarily widen, and funding volatility may intensify, becoming a core variable affecting the short-term trend of the bond market.

However, market liquidity appears to be easing, as evidenced by funding rate performance. As of the close on May 22, the weighted average rate of the seven-day pledged repo in the interbank market (DR007) was reported at 1.566%, down 0.49 basis points from the previous trading day; the overnight funding rate (DR001) dipped to around 1.46% during the session.

The Investment Advisory Department of Huachuang Securities stated that since late May, funding rates have continued to pull back and have now fallen below 1.5% again, providing support for medium- and short-term rate bonds. However, the market has observed that large banks have become more cautious in lending funds below 1.5%, suggesting that the current interest rate level may have touched the policy tolerance floor, and the policy may not wish for excessive liquidity easing. 1.5% may still be the policy anchor for funding rates in the coming period.

Outright Reverse Repo Operations May Shrink Further This Month; PBOC to Maintain Relatively Loose Operations

Ming Ming, chief economist at CITIC Securities, stated that this MLF operation, in conjunction with the RRR cut, has achieved a substantial liquidity supply, and whether subsequent outright reverse repo operations will withdraw liquidity is worth monitoring.

Wang Qing told a reporter from Caixin that the significant increase in the Medium-term Lending Facility (MLF) in May might also imply that the outright reverse repo operations would be scaled down again this month to meet the structural adjustment of commercial banks' demand for the central bank's financing tools.

"It can be observed that in April, the MLF was increased by 500 billion, while the outright reverse repo operations were reduced by the same amount. Therefore, it is necessary to consider the scale of outright reverse repo operations announced by the central bank at month-end to assess the overall medium-term liquidity injection in May." Wang Qing predicted that, considering the implementation of RRR cuts in May, the overall medium-term liquidity injection this month might experience a slight reduction.

The market believes that in order to maintain an accommodative environment, the central bank's net injection through the MLF may become a regular operation. "With the implementation of the interest rate cut in reverse repo operations in the early stage, the liability costs of commercial banks have significantly decreased. Under the multiple-price bidding mode, the MLF may coordinate with the interest rate cut. Looking ahead, to maintain abundant liquidity, the central bank may continue to adopt an accommodative stance, and net injection through the MLF may become a regular operation," Ming Ming opined.