MLF Operating Interest Rate Remains Stable
On November 25th, the central bank conducted a medium-term lending facility (MLF) operation of 900 billion yuan, with the operation rate remaining unchanged. This MLF operation was a reduced volume operation, but for some time now, the central bank has been continuously injecting large amounts of liquidity to support the funding market, with the balance of open market operations remaining at a high level.
With the local government bond issuance peak expected to reappear in December, experts anticipate that under the current supportive monetary policy backdrop, there is a high probability of a reserve requirement ratio (RRR) cut landing from the end of November to mid-December. At the same time, to maintain liquidity at the year-end, the central bank will continue to inject medium to long-term liquidity into the market in a timely manner through secondary market transactions in government bonds, outright reverse repurchase operations, and a moderate continuation of MLF operations.
According to the central bank's announcement, to maintain a reasonable and ample level of liquidity in the banking system, a 900 billion yuan MLF operation was carried out with a term of one year, a highest bidding rate of 2.30%, a lowest bidding rate of 1.90%, and a winning bid rate of 2.00%. After the operation, the balance of the medium-term lending facility stood at 6239 billion yuan.
The data shows that the MLF maturity scale in November was 1450 billion yuan, the highest peak of the year. On the 25th, 900 billion yuan was rolled over, which is equivalent to a reduction of 550 billion yuan in MLF for this month. Regarding the reduced volume operation of MLF this month, Wang Qing, Chief Macro Analyst at Orient Gold & Credit, stated that considering the central bank had already conducted a 500 billion yuan outright reverse repurchase operation in October for the first time, it is equivalent to releasing a certain scale of medium-term liquidity in advance.
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"Despite the reduced volume of MLF continuation, the central bank still provides incremental funds to the market through reverse repurchase, RRR cuts, and government bond transactions, and market liquidity will continue to be reasonably ample around the end of the year," pointed out Dong Ximiao, Chief Researcher at China United Network Communications.
In terms of interest rates, Wang Qing said that after downplaying the policy interest rate color, the MLF operation rate "follows the market," and will fluctuate in sync with market interest rates. Recently, policy interest rates, LPR (loan prime rate), and other market benchmark interest rates, as well as MLF operation rates, have remained stable. The fundamental reason is that after a package of incremental policies was introduced, the macroeconomic sentiment in October improved, the real estate market significantly warmed up, major economic indicators generally improved, and the current period has entered a policy effect observation period.
At the end of the year, factors such as the maturity and withdrawal of open market reverse repurchase agreements and the payment of government bond issuances disturb the funding market. The central bank also supports the funding market through continuous large-scale liquidity injections. Wind data shows that last week, the central bank's net injection reached 412.7 billion yuan. As of November 22nd, the balance of open market operations has remained above 1.8 trillion yuan for two consecutive weeks at a high level.
Despite many short-term disturbing factors, the overall market interest rates still fluctuate around the policy interest rates. On the 25th, the Shanghai Interbank Offered Rate (Shibor) showed mixed movements, with most short-term Shibor varieties moving higher. Specifically, the overnight Shibor rose by 0.8 basis points to 1.464%; the 7-day Shibor rose by 7.4 basis points to 1.727%; the 14-day rose by 0.1 basis points to 1.863%; the 1-month term fell by 0.2 basis points to 1.787%, setting a new low since November 2022.
This week is the last week of November, with the net payment of government bonds expected to exceed 700 billion yuan, higher than the total payment of the first three weeks, and the second-highest level in a single week this year, only lower than the over 900 billion yuan in the last week of September. Analysts pointed out that under this background, the continuation of reduced volume MLF operations indicates that the central bank will continue to use a variety of tools such as government bond purchases and outright reverse repurchases to smooth market funding fluctuations and maintain a reasonable and ample level of liquidity. At the same time, the probability of a third RRR cut this year being implemented shortly has increased.
Previously, the central bank governor Pan Gongsheng stated at the 2024 Financial Street Forum Annual Conference that it is expected to further reduce the RRR by 0.25 to 0.5 percentage points before the end of the year, depending on market liquidity conditions.
"The central bank may implement a comprehensive RRR cut shortly, injecting long-term liquidity into the market," Dong Ximiao estimated that at the end of November or in December, the central bank may cut the RRR by 0.25 to 0.50 percentage points, injecting 500 billion to 1 trillion yuan of long-term liquidity into the market.
Regarding the specific timing of the RRR cut, Wen Bin, Chief Economist at China Minsheng Bank, analyzed that if the RRR cut does not land at the end of November, considering that the first half of December is also a peak period for the supply of local government debt swaps, the rhythm mismatch between government bond supply and fiscal expenditure will disturb the funding market at the middle of the month. Additionally, the MLF maturity scale for the month also reaches a high of 1.45 trillion yuan, the market funding faces seasonal convergence, and there are factors such as guiding financial institutions to continue to increase support for the real economy and support planning for a good start to the year. The central bank's previously announced selective RRR cut of 0.25 to 0.5 percentage points is more likely to be implemented shortly.
Industry insiders also believe that the interest rate cut is in the observation period. Ming Ming, Chief Economist at CITIC Securities, said that the weighted average interest rate on loans in the third quarter fell to a historical low of 3.67%. In addition, the central bank mentioned in the third quarter monetary policy implementation report that "the current economic operation requires an increase in counter-cyclical adjustment strength, but further interest rate cuts face dual constraints of net interest margin and exchange rate internally and externally." This means that after two rounds of significant reverse repurchase rate cuts in July and September, there may be significant pressure on further LPR cuts in the short term.
But he also pointed out that looking ahead, to alleviate interest margin pressure, the possibility of further reducing deposit interest rates in the future is relatively high. Coupled with the subsequent issuance of special government bonds to support large state-owned commercial banks in replenishing core tier-one capital, the interest margin and operational pressure on commercial banks are expected to gradually ease, and there is no possibility that next year's LPR quotes will be accompanied by further reverse repurchase rate cuts.