MLF has increased for 13 consecutive months, but mid-March liquidity has started to tighten again.

On March 24, the People’s Bank of China (PBOC) issued an announcement stating that to keep bank system liquidity ample, on the 25th it would conduct a 5 trillion yuan MLF (Medium-Term Lending Facility) operation for a one-year term using a fixed-quantity auction with interest-rate bidding and a multi-price bid-cum-allocation method.

In that month, 450 billion yuan of MLF matured. After the operation was implemented, net injections totaled 50 billion yuan—an increase for 13 consecutive months, but the add-on size was smaller than the 300 billion yuan from the previous month.

In addition, the two bid-discounted reverse repo tenors in March totaled a net cash withdrawal of 300 billion yuan. Combined with the MLF net injection, in March medium-term liquidity saw a net cash withdrawal of 250 billion yuan.

“Medium-term liquidity saw a net cash withdrawal in March—this is the first time since October 2024.” Wang Qing, Chief Macro Analyst at Orient Securities, said this may have been mainly due to the net injection scale of medium-term liquidity reaching as high as 1.9 trillion yuan in the first two months of the year, and the fact that funding conditions in March remained persistently on the relatively ample side. It does not mean the central bank will continue tightening medium- and long-term liquidity. Going forward, the PBOC will comprehensively use medium- and long-term liquidity management tools such as the reserve requirement ratio, government bond purchases and sales, the MLF, and bid-discounted reverse repos to keep funding conditions relatively stable and ample.

Mingming, Chief Economist at CITIC Securities, believes that since the Chinese New Year this year, overall market conditions have been relatively loose, with liquidity supply and demand maintaining a broadly balanced state. Since March, several long-end liquidity tools have mainly been used for net cash withdrawals. In addition, recent geopolitical conflicts have raised import-inflation risks for China; monetary policy may be arranged with a focus on maintaining both internal and external balance, so that overall operations will be steadier.

Generally speaking, there is a certain degree of substitutability between medium-term liquidity injection tools and long-term liquidity injection tools such as reserve requirement ratio cuts and government bond purchases and sales. Does a net cash withdrawal in medium-term liquidity imply that a reserve requirement ratio cut is on the way?

Wang Qing believes that the timing of a reserve requirement ratio cut should be judged in conjunction with the trajectory of the macro economy and financial developments. Since late February, changes in the situation in the Middle East have pushed international oil prices sharply higher, and in March China’s domestic overall price level has shown a strong upward trend. This could also create some disruption to economic growth momentum. In the short term, as external uncertainty suddenly rises, domestic monetary policy is likely to focus on maintaining ample liquidity and stabilizing market expectations. The policy focus at present will shift temporarily toward controlling an overly rapid rise in prices, so operations such as reserve requirement ratio cuts and interest rate cuts may be appropriately delayed.

Mingming believes that going forward, attention can be paid to marginal changes in fundamental data and to changes in volatility in global capital markets. It is expected that monetary policy will maintain a moderately accommodative stance.

(This article comes from First Finance)