China pumped 498 billion yuan (US$73 billion) into its banking sector on Tuesday in the biggest injection of MLF liquidity since January, a move many market observers said will most likely take some of the stress out of the quarter’s end for harried interbank traders and help put a lid on rising funding costs at Chinese financial institutions.
June’s first one-off Medium-term Lending Facility has already provided more funding than the 431.3 billion yuan of MLF instruments maturing during the month.
Mainland-based brokerage CICC predicts that liquidity this June would not be too tight since capital outflows may have reversed course amid higher yuan valuations against the dollar. On top of that, non-bank financial institutions have also already gone through a period of deleveraging, lessening their thirst for short-term liquidity, Securities Daily reported.
Traders interviewed by the financial newspaper explained that many funding desks have been preparing for a possible liquidity crunch toward the end of the month, while awaiting actions by the Chinese central bank to counter any abnormal volatility.
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Tuesday’s pump priming came on the foot of Monday’s 70-billion yuan of reverse repo issuance, which comprised 30 billion yuan of 28-day liquidity, a tenure that had been missing in action since May 11. The use of a funding instrument that isn’t due until after the quarter’s end was taken as a signal of the central bank’s resolve to maintain steady liquidity.
The chart above shows that 470 billion yuan of reverse repos are scheduled to mature between June 5 and June 9, respectively. At the same time, 224.3 billion yuan of MLF is expiring this week, including 151 billion yuan on Tuesday and 73.3 billion yuan on Wednesday.
The long-tenured Medium-term Lending Facility and the shorter-dated Reverse Repos are two of the People’s Bank of China’s most commonly used money market instruments to stabilize the overall liquidity situation in its monetary system.
The seven-day reverse repo acts as the core tool for the PBOC to adjust daily liquidity in the money market, supplemented by its 14-day and 28-day version. The longer-dated reverse repos could be used to smooth out seasonal as well as temporary liquidity events, the central bank’s 1Q monetary policy report wrote.
The benchmark 7-day Shanghai interbank borrowing rate has been trading around 2.9% since early May, up approximately 60 basis points from 2.3% a year ago, as the PBOC dials back its liquidity supply to the money market in a bid to prevent a blowout of asset bubbles in the country and take down runaway financial leverage among its non-bank financial institutions.