PBoC Ends Tight Operations: 600 Billion Yuan MLF on May 25 as Late-Month Liquidity Pressures Mount

To maintain ample liquidity in the banking system, the People's Bank of China (PBoC) announced today that it will conduct a 600 billion yuan Medium-term Lending Facility (MLF) operation on May 25, with a one-year maturity. Given that 500 billion yuan in MLF matures this month, the net additional injection amounts to 100 billion yuan, reversing last month's 200 billion yuan net withdrawal.

In recent months, the PBoC had consistently reduced the scale of its open-market operations, gradually draining what it considered excess liquidity from the banking system. In March and April, the central bank withdrew 250 billion yuan and 600 billion yuan respectively via outright reverse repos and MLF. In the first half of May alone, 1 trillion yuan was drained, setting a single-month record since the MLF instrument was introduced.

May MLF Expanded: Late-Month Liquidity Disruptions on the Rise

In its May MLF tender announcement, the PBoC stated it will conduct a 600 billion yuan MLF operation on May 25, 2026 via fixed-volume, rate-bidding with multiple winning rates, at a one-year tenor.

Wang Qing, Chief Macro Analyst at Orient Jincheng, told reporters that the net 100 billion yuan expansion in May, compared with a 200 billion yuan contraction in April, exceeded market expectations given the recent trend of scaled-back open-market operations. He noted this reflects a "drain short, inject long" approach in central bank medium-term liquidity management for the month.

Several factors are expected to tighten interbank liquidity in late May. The tax payment deadline falls on May 22, historically a period of elevated money market rate volatility. Starting May 25, the market enters the cross-month phase for 7-day reverse repos, when demand for base money typically rises sharply.

In addition, government bond net issuance has surged in mid-to-late May. On May 22, the Ministry of Finance officially launched the first tranche of special central government financial institution recapitalization bonds for the year. These compounding liquidity demands reinforce the rationale for the PBoC's decision to resume net MLF injections in May.