On November 15, the central bank announced on its website that it would carry out 495 billion yuan of open market reverse repurchase operations and 1.450 billion yuan of medium-term lending facility (MLF) operations on that day, with interest rates of 1.8% and 2.5% respectively, both consistent with the previous period.
Image source: Central Bank website
Since the size of the MLF due this month is 850 billion yuan, the central bank invested a net 600 billion yuan in the MLF continuation in November. It is worth noting that this month’s MLF operation scale and net investment volume were both the highest during the year.
As for the reasons for carrying out open market operations this time, the central bank pointed out in the announcement: “In order to maintain reasonable and sufficient liquidity in the banking system, hedging the impact of short-term factors such as tax period peaks and government bond issuance and payment, while appropriately supplying medium and long-term base money.”
Wang Qing, chief macro analyst of Oriental Jincheng, pointed out: “The large-scale increase in MLF volume in November sent a signal that the policy of stabilizing growth will continue to be used, and it can also protect the increase in government bond issuance.”
MLF net investment of 600 billion yuan
The “Daily Economic News” reporter noticed that so far, the central bank has exceeded the MLF limit for one consecutive year. The net investment volume has expanded significantly in recent months. From August to October this year, the net investment volume of MLF was 1 billion yuan, 191 billion yuan, and 289 billion yuan respectively. Net investment further expanded in November. This month, the central bank’s MLF investment scale was 1.45 trillion yuan, with 850 billion yuan due, achieving a net investment of 600 billion yuan.
From a financial perspective, on November 14, the overnight Shibor reported 1.9130%, up 15.90 basis points; the 7-day Shibor reported 1.9670%, up 12.70 basis points; the 14-day Shibor reported 2.2070%, up 11.80 basis points.
Data previously released by the central bank showed that the weighted average interbank lending rate in October was 1.92%, 0.05 percentage points and 0.51 percentage points higher than the same period last month and last year respectively. The weighted average interest rate of pledged repurchase was 2.06%, which was 0.1 percentage point and 0.6 percentage point higher than the same period last month and the previous year respectively.
Zhou Maohua, a macro researcher at the Financial Markets Department of China Everbright Bank, told reporters that the incremental renewal of MLF is due to the current central increase in interbank certificate of deposit interest rates and government bond interest rates, which are higher than MLF interest rates, reflecting the recent increase in the banking system’s demand for medium and long-term funds. The main reason is that there have been many disturbance factors in the domestic market recently, such as the large maturity of tax payment, deposit payment, open market operation tools, and the large issuance of government bonds, which have a greater impact on market liquidity disturbances.
“In order to stabilize medium- and long-term funding and guide financial institutions to increase support for weak links and key areas of the real economy, the central bank is expected to moderately increase long-term liquidity provision.” Zhou Maohua said.
Wang Qing pointed out that the maturity volume of MLF in January was 850 billion, the largest in the year; the operation scale in that month reached 1.45 trillion, which means the additional volume was increased by 600 billion, and the increase was significantly expanded on the basis of 289 billion last month. The direct reason is that market interest rates have continued to rise since October, mainly due to factors such as maintaining a high level of credit and the large-scale issuance of special refinancing bonds used to replace various types of local government implicit debts.
He further pointed out that we are currently in a critical stage of promoting the continued recovery of economic recovery momentum, and it is necessary to maintain reasonable and sufficient market liquidity and curb the excessive upward trend of market interest rates. In addition to the flexible implementation of reverse repurchase operations, the large-scale extension of MLF will help alleviate liquidity pressure in the banking system.
Experts: Another RRR cut is possible before the end of the year
Since the beginning of this year, the MLF interest rate has been cut by a cumulative 25 basis points twice, by 10 basis points and 15 basis points in June and August respectively. The “Daily Economic News” reporter noticed that MLF operations continued to increase in volume in November, but the winning bid rate remained unchanged for three consecutive months.
Image source: Wind client
Zhou Maohua said that MLF is an affordable sequel. The main reason is that monetary policy has been proactive this year. In the first 10 months, the total amount of new domestic credit increased by 1.68 trillion yuan year-on-year. The credit growth rate is stable and moderate. The real economy loan interest rate continues to hit a record low, reflecting that the policy interest rate is reasonable. ; Credit in October was overall in line with expectations.
“At the same time, monetary policy must not only create a suitable monetary environment for the economy, but also improve the accuracy and quality of policy implementation, taking into account internal and external balance. In the short term, domestic interest rate market-oriented reforms should be deepened to guide financial institutions to rationally adjust deposit interest rates by tapping the potential of LPR reform. Stabilizing bank liability costs will expand space for banks to reduce financing costs for the real economy,” Zhou Maohua said.
Wang Qing said that considering that the MLF operating interest rate has been continuously reduced in June and August, and that the overall economy has entered a recovery process since the third quarter, including this month, the recent MLF operating interest rate has been unchanged in line with market expectations.
Predicting whether there is still room for subsequent RRR cuts and interest rate cuts, Wang Qing believes that under current market conditions, MLF is expected to continue to increase significantly in December. Comprehensive consideration of the liquidity needs brought about by the subsequent credit extension, special refinancing bond issuance and additional issuance of treasury bonds, as well as from the perspective of optimizing bank liquidity structure and reducing bank capital costs, despite the recent continuous large-scale increase in MLF, It is possible that the reserve requirement ratio will be cut again before the end of the year, and the reduction is expected to be 0.25 percentage points.
Wang Qing also said that the CPI returned to negative year-on-year growth in October, and the PPI will continue to be in a deflationary state for a period of time, which means that the current real loan interest rate after subtracting the inflation rate from the nominal loan interest rate is relatively high. In the future, we do not rule out further reductions in policy interest rates, thereby guiding macro interest rates to match the requirements of promoting economic growth to return to potential levels. In addition, as the operation of the foreign exchange market stabilizes, exchange rate factors will not pose a substantial obstacle to the flexible adjustment of domestic policy interest rates.