PBOC to Roll Over 500 Billion Yuan of 1-Year MLF on July 24

China's central bank said on July 23 it will conduct a 500 billion yuan one-year medium-term lending facility (MLF) operation on July 24 to keep banking system liquidity ample. Together with 700 billion yuan of added buyout reverse repo operations in July, mid-term liquidity injections for the month will rise by 800 billion yuan, reversing four straight months of smaller net injections and restoring net positive supply across all three mid-term liquidity tools, according to Jiemian News.

Dongfang Jincheng chief macro analyst Wang Qing said the continued expansion of July MLF rollover and the return to net liquidity injection reflect higher market rates after earlier open-market operations were scaled back, as well as a sharp increase in government bond net financing this month, which he estimated at about 1.3 trillion yuan, up by roughly 400 billion yuan from June. He said the move should help keep money-market liquidity ample and support government bond issuance. The PBOC said last week that in the second half it will strengthen the flexibility and targeting of monetary policy and use counter-cyclical and cross-cycle adjustments to support stable growth and financial market stability.

Wang also said third-quarter macro policy may step up counter-cyclical adjustments, including faster government bond issuance and the rollout of 800 billion yuan in new policy financial instruments. Looking ahead, he said mid-term liquidity tools including MLF may continue to be rolled over in larger amounts, and there is room for interest-rate cuts and reserve requirement ratio cuts later this year. China Lianhe chief economist Dong Ximiao said the July liquidity boost was aimed at meeting higher cross-month funding demand and tax-period disturbances, and that the PBOC may continue using larger MLF and buyout reverse repo rollovers in August; he did not rule out a reserve requirement ratio cut in the third quarter.