By Nathaniel Taplin

SHANGHAI (Reuters) – The People’s Bank of China has queried some banks on their demand for medium term lending facility (MLF) loans later in July, multiple sources with direct knowledge of the matter told Reuters on Friday.

China’s central bank has increasingly relied on MLF loans to guide medium-term interest rates and manage liquidity in the banking system. They are typically for periods from three months to one-year long.

More broad-based easing tools such as cuts to banks’ reserve requirement ratios release too much liquidity into the banking system at a time when policymakers are trying to manage rising credit risks and avoid sharp yuan depreciation, analysts say.

“The MLF is a frequently employed monetary instrument, and financial institutions can indicate their demand for any maturities at any time,” said the central bank’s press office in an emailed statement, without confirming or denying it had made inquiries.

“The central bank comprehensively considers liquidity conditions in the banking system and other factors when choosing the amount to offer, in order to maintain banking sector liquidity at a sufficient and reasonable level and guide financial institutions to increase support towards key or weak economic sectors.

“Therefore, the central bank inquiring on financial institutions’ demand is an everyday form of communication, it does not represent a monetary policy signal.

“When we conduct MLF operations, we release the result to the public the same day in a timely, open and transparent fashion. In order to serve evolving market demand, in the future the central bank’s movements will be more closely aligned with financial institutions. This is a part of the central bank’s market communication, it is not necessary to over analyse it.”

Sources said the loans would be offered on July 13 and July 18, when previous MLF loans would come due.

“As things stand and pending another internal or external shock we expect (the PBOC) to support the economy by sticking to its box of liquidity management tools and a managed depreciation of the renminbi rather than anything more dramatic,” wrote Gilliam C. Hamilton, head of the Beijing office of NSBO China Policy Research in a note on Thursday.

An editorial in the state-owned China Securities Journal earlier this week said that a slower increase in money supply was likely in the second half, and the central bank would continue to rely on MLFs to manage banking sector liquidity.

(Reporting By Nathaniel Taplin and the Shanghai Newsroom; Editing by Christian Schmollinger and Kim Coghill)

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