The central bank will conduct 400 billion yuan in Medium-term Lending Facility (MLF) operations on July 25

    For five consecutive months, the central bank has increased the volume of its MLF operations.

    To maintain ample liquidity in the banking system, the People's Bank of China (PBC) announced on July 24 that it will conduct 400 billion yuan in one-year Medium-term Lending Facility (MLF) operations on July 25. The operations will be conducted through fixed-amount, fixed-interest-rate bidding with multiple price levels. Given that 300 billion yuan of MLF maturing this month, this operation represents a net injection of 100 billion yuan in July, marking the fifth consecutive month of increased MLF operations.

    Considering that the central bank has already achieved a net injection of 200 billion yuan through outright reverse repos this month, the overall net liquidity injection in mid-July reached 300 billion yuan, continuing to demonstrate the central bank's moderately accommodative monetary policy stance.

    Since the central bank introduced outright reverse repos last October, monetary policy operations have gradually reduced reliance on MLF. In March this year, MLF operations shifted to a fixed-amount, fixed-rate bidding, multiple-price-winning approach, fully shedding its policy attributes to return to its role as a liquidity injection tool. It now focuses on providing one-year liquidity, complementing other term-specific instruments within the central bank's liquidity toolkit.

    As the central bank advances its monetary policy framework transformation, its liquidity toolkit now features more robust reserves and a more rational term distribution. Long-term tools include reserve requirement ratio cuts and government bond purchases; medium-term tools encompass MLF, outright reverse repos, and various structural instruments; while short-term tools comprise 7-day open market reverse repos and temporary overnight reverse/repo operations.

    Since March this year, the central bank has maintained an increased volume of MLF rollovers. “MLF may return as the primary channel for medium-term liquidity injection, alleviating pressure on banks' net interest margins.” Sun Binbin, Chief Economist and Director of Research at Caitong Securities, noted that amid ample liquidity and sustained pressure on banks' net interest margins, the MLF's longer maturity, predictable issuance and settlement timelines provide stable expectations for financial institutions. Moreover, multiple-tiered bidding helps reduce funding costs and better meet the differentiated funding needs of various participants. The central bank may increase MLF utilization going forward, benefiting banks' funding side.

    At a recent State Council Information Office press conference, PBoC Deputy Governor Zou Lan emphasized that the central bank will further implement its moderately loose monetary policy. In terms of aggregate policy, it will carefully calibrate the intensity and pace of implementation to maintain ample liquidity.

    Wen Bin, Chief Economist at China Minsheng Bank, anticipates that amid support for domestic demand and reduced external constraints, the central bank will continue employing medium-to-short-term liquidity management tools—including pledged reverse repos, MLF, and outright reverse repos—to maintain reasonable and ample liquidity in the banking system, sustaining the “moderately accommodative” policy stance.