The central bank conducted MLF operations worth 300 billion yuan today, increasing net injection for four consecutive months and ensuring a stable liquidity situation across the quarter.

The People's Bank of China (PBOC) conducted 300 billion yuan in Medium-term Lending Facility (MLF) operations today. With 182 billion yuan in MLF maturing this month, this means the PBOC's net MLF injection in June reached 118 billion yuan, marking the fourth consecutive month of increased operations. As of June 16, the PBOC also conducted a net injection of 200 billion yuan through outright reverse repo operations, bringing the total net injection of medium-term liquidity in June to 318 billion yuan.

Industry insiders told a reporter from Cailian Press that while the RRR cut in May released 1,000 billion yuan in long-term liquidity, the medium-term liquidity has remained in a state of net injection in recent months, primarily due to two reasons. First, the continuous large-scale issuance of government bonds and the peak expiration scale of interbank certificates of deposit in recent months. Second, to signal the continued strengthening of quantitative monetary policy tools.

Stable Inter-quarter Funding Conditions in June as PBOC Continues to Inject Liquidity

Since March, the PBOC has achieved net injections through MLF operations for four consecutive months. According to the announcement, the PBOC conducted 300 billion yuan in MLF operations today, with a net injection of 118 billion yuan. Combined with outright reverse repo operations, the total net injection of medium-term liquidity in June reached 318 billion yuan, continuously injecting liquidity into the market.

Wang Qing, Chief Macro Analyst at Dongfang Jincheng, told a reporter from Cailian Press that while the RRR cut in May released 1,000 billion yuan in long-term liquidity, the medium-term liquidity has remained in a state of net injection in recent months, primarily due to two reasons. First, to maintain sufficient liquidity in the banking system amid the continuous large-scale issuance of government bonds and the peak expiration scale of interbank certificates of deposit in recent months, controlling fluctuations in funding conditions and stabilizing market expectations. Second, to signal the continued strengthening of quantitative monetary policy tools, promoting steady growth in outstanding social financing and M2, better meeting the financing needs of enterprises and residents, and strengthening counter-cyclical adjustments.

Data from ChinaMoney shows that since June, DR007 (the weighted average interest rate for 7-day repurchase agreements among deposit-taking institutions in the interbank market) has remained stable. As of June 20, the average DR007 for the month was 1.53%.

On June 6 and June 16, the PBOC conducted 1,000 billion yuan in 3-month (91-day) outright reverse repo operations and 400 billion yuan in 6-month (182-day) outright reverse repo operations, respectively, with a cumulative injection of 1,400 billion yuan. After offsetting the 1,200 billion yuan in outright reverse repo operations maturing this month, a net injection of 200 billion yuan was achieved.

Xiao Jinchuan, Co-Chief Macro Analyst at Huaxi Securities, believes that inter-quarter funding conditions in June may remain stable. Current funding prices are relatively low, and even if there is a seasonal increase at quarter-end, it may still be within an acceptable range. Additionally, current funding supply is relatively abundant. Banks' willingness to lend funds remains at a high level for the year, and the central bank's overall attitude is supportive. If the central bank maintains a certain pace of net injection in the future, coupled with the renewal of MLF (medium-term lending facility) on June 25, the increase in funding costs during this quarter-end week may be weaker than in the same period historically.

"Considering that two rounds of outright reverse repo operations with different tenors have already been conducted this month, adequately meeting the funding needs of financial institutions, we judge that the likelihood of conducting another round of outright reverse repo operations before month-end is relatively small," said Wang Qing.

Higher liquidity gap in July; RRR cuts and interest rate cuts still possible in H2

As half the year has passed, the industry believes that there are some challenges in the funding situation for the first half of the year. Meanwhile, looking ahead to H2, there is still room for RRR cuts and interest rate cuts, with RRR cuts having a higher priority. Considering that supply pressures may be relatively concentrated in Q3, it is expected that the central bank will likely conduct forward-looking RRR cuts again.

From the funding situation perspective, Mingming, the chief economist at CITIC Securities, estimated that the liquidity gap in July may reach 1,000 billion yuan. The pressure on the funding situation from fiscal expenditures and government bond issuance payments has significantly increased, and it is difficult to effectively cope with this pressure solely through spontaneous market adjustments. The central bank's policy support will become a key variable.

Wang Qing said that monetary policy is expected to continue to exert efforts in expanding domestic demand and stabilizing growth in H2, strengthening coordination with fiscal policy. As an important quantitative tool, MLF is expected to continue the trend of increased renewal and coordinate with outright reverse repo operations to maintain a net injection pattern of medium-term liquidity. This will not only help stabilize the funding situation and support government bond issuance but also enhance banks' credit lending capabilities and effectively hedge against the impact of external environmental fluctuations on the economy. However, the market still needs to be vigilant about short-term fluctuations in funding rates brought about by special time points such as government bond payments and tax periods.

Multiple institutions also believe that there are still windows for RRR cuts and interest rate cuts in H2. China Galaxy Fixed Income said that in terms of RRR cuts, they have a higher priority and there is still room, with implementation expected in H2. Under a neutral estimate, a 50BP RRR cut is expected to materialize. Additionally, under the advancement of supply-side structural reforms, the necessity of targeted RRR cuts to support the resolution of structural contradictions in the industrial sector has increased. Regarding interest rate cuts, this round of asymmetric interest rate cuts aims to protect banks' net interest margins, and there is potential for further interest rate cuts. Considering external disturbances, it is expected that the US Fed will initiate interest rate cuts in September, making Q3 an observation period for the opening of China's interest rate cut window. It is estimated that the interest rate cut amplitude in H2 may be 1-2 times and 20-30BP.

TF Securities believes that considering that supply pressures may be relatively concentrated in Q3, it is expected that the central bank will likely conduct forward-looking RRR cuts again to hedge against this, with an amplitude of 25-50BP. It is also not ruled out that the central bank may inject liquidity through outright reverse repo operations, MLF injections, and conducting government bond purchases instead of RRR cuts.