PBoC Plugs ￥200 B Hole With More MLF, But RRR Cut Probably Needed

The PBoC expand MLF by 200 billion yuan on Tuesday, but it does not lift the outstanding total past March's peak. With talk of an RRR cut resurfacing, it looks like China is offsetting tight liquidity. A Chinese article also argues the PBoC is taking a more proactive approach to push liquidity into policymakers' preferred sectors.

Reuters: PBOC injects medium-term liquidity in surprise move as trade war escalates

China’s central bank on Tuesday lent 200 billion yuan ($31 billion) to financial institutions via its medium-term lending facility (MLF), highlighting concerns over liquidity and potential economic drag from a trade war with the United States.

Kitco: China central bank says banks' reserve ratios should be cut, fuels talk of easing

China should appropriately cut banks’ reserve requirement ratios (RRR) to help ease their burdens, the central bank said in a working paper on Tuesday, fanning expectations of an imminent policy move to support the economy as U.S. trade threats grow.

This is easing, but it's not expansionary. The PBoC trying to keep liquidity from tightening too much. Dollar pressure is building. Furthermore, MLF outstanding fell sharply in April and held steady in May. This increase doesn't exceed the March 2018 peak.

iFeng: 央行意外投放2000亿元，意义非同一般！

The reason is called "unexpected" because it is a new MLF. On June 6 of this year, the People's Bank of China has carried out 461 billion yuan in MLF operations. Excessive hedging amounted to 259.5 billion yuan in June, the balance of MLF increased by 203.5 billion yuan on the same day.

Together with the additional RMB 200 billion invested on the 19th, it is equivalent to a cumulative net investment of 403.5 billion yuan in June and the MLF balance increased to 4.24 trillion yuan.

The official reason:

Regarding the reasons for launching, the People's Bank of China also explained: “The impact of such factors as the hedging of the peak tax period, payment of government bond issuances, and the timing of reverse repurchase, and at the same time make up for the short-term liquidity gap in the banking system.”

1

However, in conjunction with the series of operations conducted by the PBC in June, it is not difficult to see the more far-reaching intentions of monetary policy. In addition to addressing the liquidity demand at key points in the middle of the year and maintaining a stable and neutral monetary policy tone, the People's Bank began to pay more attention to structural regulation and guidance and made efforts to solve deeper liquidity structure problems.

Since entering the month of June, it has become apparent that when the People's Bank of China injects liquidity into the market, it will not only make up for the amount of water but also pay more attention to the flow. In other words, the People's Bank began to adopt more structural monetary policies than aggregate monetary policies.

For example, the RRR cut is not an overall reduction, but a downward adjustment. Instead of all the new volume, the RRR cut funds are used to replace the MLF; instead of simply increasing the MLF, the scope of the MLF collateral is expanded. Comprehensive use of tools such as PSL to strengthen support for key areas, and so on.

2

Careful analysis of the structural problems in the liquidity of the banking system can be seen from different perspectives, such as deadlines, flows, and institutions.

First, the structural imbalance of the deadline. All along, there are medium and long-term liquidity gaps within the banks. This report also mentioned in previous reports that some institutions still have large demand for medium- and long-term funds. In particular, various policies have strengthened the mismatch of assets and liabilities. In terms of supervision, banks also need to gradually adjust the liabilities to meet the requirements.

The People's Bank of China has paid more attention to the matching of funds with different deadlines in the recent funding. Treasury cash deposits are mainly for 3 months, and MLFs are mainly for 1 year. On the 15th, the People's Bank oversupplyed 100 billion yuan of cash in the treasury, and the amount due this month was 50 billion yuan. The People’s Bank of China’s release of 1-year MLF this time is also aimed at filling the short-term liquidity gap in the banking system.

As shown in the figure, since the month of June, the PBC has stepped up efforts to provide medium and long-term funds.

Second, it is the flow of funds. From the orientation and reduction to expanding the scope of MLF collateral, we can see that the People's Bank has used different monetary policy tools to vigorously direct capital flows to key areas and weak links in the national economy, such as small and micro enterprises, agriculture, rural areas, green environment, and innovative economy.

Especially for small and micro enterprises, the People’s Bank’s support has continued to increase. At present, the proportion of financing for small and micro enterprises in China from formal financial institutions and private financing is roughly 6-4.

Governor of the People's Bank of China, Yi Gang, also stated during the Lujiazui Forum that it is necessary to provide more financing through formal financial channels so that formal finance will become the main force for the financing of small and micro enterprises. The People's Bank of China will be negotiating with relevant departments to issue comprehensive policies for the improvement of services for small and micro enterprises and increase the loans to small and micro enterprises.

Finally, there is an imbalance between agencies. Within the financial system, structural imbalances have always existed between large banks and small and medium banks, banking institutions and non-bank institutions. In particular, at the end of the quarter, there was a clear trend of widening interest spreads between banks and non-bank institutions, which showed that liquidity was unevenly distributed.

In fact, the People's Bank of China has expanded the scope of the MLF collateral and targeted measures to reduce the liquidity of the small and medium-sized banks and institutions, which has increased the "popularity" of monetary policy. The ultimate purpose of these initiatives is also to enable these financial institutions to better serve the real economy.

The effectiveness of structural adjustment is emerging. According to data from the People's Bank of China, in May, renminbi loans increased by 1.15 trillion yuan, an increase of 40.5 billion yuan year-on-year, and microfinance and agricultural-related loans were accelerated.

From the perspective of the growth of social financing, from January to May, an increase of 7.9 trillion yuan, a year-on-year increase of 1.44 trillion yuan, a year-on-year increase of 10.3%, mainly due to the strong regulatory, de-leverage policy effect gradually, entrusted loans, trust loans Off-balance-sheet financing such as undiscounted bank acceptance bills declined, and financing in the bond market declined.