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PBOC asks banks about MLF loan demand, sources say, as easing speculation grows

The People’s Bank of China (PBOC) has asked commercial lenders about demand for medium-term lending facility (MLF) loans, ahead of a liquidity operation announcement on Thursday which is being closely watched for any signs it is shifting its policy stance, two market sources with direct knowledge of the matter said on Wednesday.

A batch of one-year MLF loans worth 400 billion yuan ($61.81 billion) is due to mature on Thursday. Last week, China surprised markets by cutting banks’ reserve requirements, and said some of the money freed up would be used to repay the debt.

The PBOC asked some commercial banks on Monday about expected demand for more MLF loans, the sources said.

The PBOC said on Friday that it would cut the amount of cash that banks must hold as reserves, releasing around 1 trillion yuan ($154.58 billion) in long-term liquidity from July 15 to bolster China’s post-COVID economic recovery, which is starting to lose some steam.

Typically, the PBOC has rolled over maturing MLF loans, and often topped them up, to prevent a tightening in liquidity in the banking system. At the same time, it announces interest rates on the new loans, sending a signal to financial markets of its policy intentions.

Most analysts do not expect an imminent MLF rate cut, but speculation is growing that China could cut its benchmark lending rates as soon as next week, especially if economic data on Thursday proves weaker than expected. read more

“(Markets) thought there would not be a MLF rollover after the RRR cut, but (the central bank) still asked about demand on Monday,” said one of the sources.

It was not clear how much cash from the RRR cut would be used to repay the maturing MLF loans.

The sources noted that such MLF demand queries did not guarantee MLF operations.

Analysts and traders said if the PBOC planned to inject more cash via the liquidity tool on Thursday, money rates and bond yields were likely to fall further.

Compared with the long-term low cost of funds from RRR cuts, MLF loans are rather expensive, with interest rates on one-year of such debt at 2.95%. A total of 4.15 trillion yuan worth of MLF loans are set to expire in the second half of this year.

Market speculation is growing over whether the PBOC’s RRR cut was a one-off, pre-emptive move to lower corporate borrowing costs and ensure ample liquidity, or if it signals a possible shift to an easier policy stance as economic growth hits a soft patch. Until last week, investors had believed it was slowly rolling back emergency pandemic stimulus. read more

The PBOC is likely to deliver another 50-basis point cut in the RRR in the fourth quarter as pressure on the economy persists while consumer inflation eases, according to the latest Reuters poll published on Tuesday. read more

Sun Guofeng, head of the monetary policy department at the PBOC, told media on Tuesday that China would maintain its normal monetary policy stance and prioritise stability and focus on domestic conditions. read more

($1 = 6.4690 Chinese yuan)

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