June 6, 2018 / 2:08 AM / 16 days ago

China central bank injects net 203.5 billion yuan with hefty one-year MLF rollover

SHANGHAI (Reuters) - China’s central bank lent 463 billion yuan ($72.43 billion) to financial institutions on Wednesday via its 1-year medium-term lending facility (MLF), with interest rates unchanged, it said in a statement.

FILE PHOTO: A Chinese national flag flutters outside the headquarters of the People's Bank of China, the Chinese central bank, in Beijing, China April 3, 2014. B REUTERS/Petar Kujundzic/File Photo

The fund injection via MLF effectively rolled over 259.5 billion yuan worth of such loans maturing on the same day, as markets had expected.

It also added a net 203.5 billion of liquidity, the central bank said.

The move comes as more Chinese companies are concerned about tightening credit conditions, which are pushing up borrowing costs and leading to a gradual increase in corporate bond defaults.

Analysts believe the People’s Bank of China (PBOC) may be adjusting the way it conducts its various liquidity operations as financing conditions change, with Wednesday’s move possibly pushing back the timing of another expected cut in banks’ reserve requirement ratios (RRR).

Markets have generally expected another RRR cut in the second half after a surprise reduction in April, with some speculation that it could come as early as June or July.

“Today’s China MLF operation reinforces our view for a delay in the next possible reserve requirement ratio cut,” Frances Cheung, head of Asia macro strategy at Westpac First said.

Cheung noted 238.5 billion yuan of MLFs due in June was repaid with money from the RRR cut in April.

“Following this pattern, the RRR cut might have covered MLF up to August. Second, the PBOC more than rolled over the remaining 259.5 billion yuan maturing in June, suggesting the near-term strategy may be to cover liquidity needs via MLF.”

The PBOC cut the cash commercial banks must hold as reserves in April to help them repay their outstanding MLFs, describing it as a liquidity operation and not a signal of a monetary policy shift.

Wednesday’s injection was aimed to “keep liquidity reasonable and stable in the banking system, strengthen its support for small-and-micro companies, the green economy and other areas, and promote healthy development of credit bond market,” the PBOC said in the statement on its website.

The interest rate for the one-year MLF was unchanged at 3.30 percent.

After the operation, outstanding MLF loans will be increased by 203.5 billion yuan to 4.2205 trillion yuan, according to the statement.

The MLF rollover was also the first since the central bank expanded the guarantee scope of the bond instrument last Friday, by allowing banks to use suitably good collateral to ensure stable liquidity in its financial system.

ING economist Iris Pang said the move to expand collateral for MLFs also suggested the PBOC will be in no rush to cut RRR in June.

“Collateral expansion for MLF would reduce contagion risks and calm the market, however, we still expect standalone default cases, especially for companies with weak financials as financial deleveraging reform continues,” Pang wrote in a note earlier on Wednesday.

Pang cited a Securities Daily report that said seven issuers had defaulted on 22 bonds this year as of June 1.

“Though the number of issuers and default amount look small, default risk is rising in the onshore bond market.”

ING believes the PBOC will still raise money market rates in mid-June, following an expected policy rate hike by the U.S. Federal Reserve.

But given that liquidity is tight, Pang said the PBOC’s move would be a modest five basis points, echoing similar small adjustments it has made in the past year to maintain the interest rate spread between China and the United States.

The PBOC also said it had skipped reverse repos on Wednesday morning. 180 billion yuan worth of reverse repos is set to expire on Wednesday.

Reporting by Winni Zhou and John Ruwitch; Editing by Sunil Nair and Kim Coghill

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