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On August 26, the central bank conducted a 300 billion yuan one-year medium-term lending facility (MLF) operation, with the winning bid rate remaining unchanged at 2.30%. The 401 billion yuan MLF due on August 15 was renewed in a reduced volume. On the same day, the central bank conducted a 471 billion yuan 7-day reverse repurchase operation in the open market, with an operating rate of 1.70%, the same as before.

From a comprehensive market analysis, the amount of reverse repurchases maturing this week is high, the net payment of government bonds has risen again, and the month-end is approaching. Liquidity is facing many disruptive factors. The "parity increase" of open market operations (OMO) and the "parity reduction" of MLF will generally help stabilize market liquidity and meet the market's short-term and medium-term funding needs.

MLF continues to be reduced in volume

The scale of MLF operations shrank by 101 billion yuan in August.

Wang Qing, chief macro analyst at Orient Securities, said that on July 25, the central bank had added an MLF operation with a scale of 200 billion yuan. If the scale of the additional operation on July 25 and the scale of the operation on August 26 are combined, the total scale is 500 billion yuan, and the actual operation is an incremental renewal of 99 billion yuan. The reason behind this is that the current government bond issuance is at its peak, and monetary policy is increasing its coordination with fiscal policy to control the financing cost of government bonds.

The MLF operating rate in August was 2.3%, the same as that on July 25, which was in line with market expectations. The reason behind this is that the MLF operating rate was just significantly lowered by 20 basis points on July 25, and the policy rate remained unchanged in August, so the market interest rate has remained generally stable recently.

After the July rate cut, the MLF rate is 2.3%, which is still relatively high compared to the current interbank deposit rate. On August 23, the 1Y-AAA interbank deposit rate was 1.96%. In this environment, the MLF reduction can better meet market demand.

Dong Ximiao, chief researcher at China UnionPay, said that the one-year MLF interest rate is higher than the interbank deposit rate, and financial institutions are relatively less enthusiastic about applying for it. The reduction in the amount of MLF renewal is in line with market needs.

It should be pointed out that the current MLF operating rate has faded the color of the policy rate, has the characteristics of "following the market", and will fluctuate with the market interest rate. This also means that future fluctuations in the MLF operating rate do not mean that the central bank is releasing a signal of adjusting the policy interest rate.

Wang Qing said that after MLF faded the color of policy interest rate and LPR (loan market benchmark rate) quotation turned to anchor the central bank's 7-day reverse repurchase rate, there was no need to conduct MLF operation in advance to provide pricing basis for LPR quotation. Adjusting MLF operation to the 25th of each month (postponed in case of holidays) will avoid blurring policy interest rate signals on the one hand, and at the same time take into account the fluctuation of the funding surface at the end of the month, effectively controlling the volatility of DR007.

Wen Bin, chief economist of China Minsheng Bank, believes that in the future, the regular postponement of MLF operations can not only better smooth out month-end fluctuations, but also further decouple from LPR quotes. The role of quantity will continue to manifest itself and the role of price will gradually fade.

RRR cuts are still in the toolbox

On August 26, short-term Shibor rose collectively. Overnight Shibor rose 6.1BP to 1.862%, 7-day Shibor rose 11.1BP to 1.936%, 14-day Shibor rose 0.1BP to 1.955%, and 1-month Shibor rose 0.4BP to 1.823%.

As the month draws to a close, the money market is tightening, and the central bank needs to increase the scale of funds through open market operations to effectively control the volatility of DR007. This is also the main reason why the scale of net reverse repurchase reached 418.9 billion yuan today.

On that day, the central bank carried out 471 billion yuan of reverse repurchase operations, and the reverse repurchases that matured on the day were 52.1 billion yuan.

Dong Ximiao said that since August, the central bank has stepped up its open market reverse repurchase operations, injected more short-term liquidity into the market, and effectively eased the short-term funding tension. The open market operations on August 26 continued the idea of ​​"releasing short and locking long".

CITIC SecuritiesChief Economist Mingming predicts that the operation mode of OMO excess and MLF reduction on the 25th of each month will become the norm.

According to Wind statistics, the amount of MLF maturing in subsequent months will gradually increase. From September to December, the amount of MLF maturing was 591 billion, 789 billion, 1.45 trillion, and 1.45 trillion yuan respectively.

Looking ahead, Wang Qing said that in the short term, government bonds will continue to be at a peak issuance period. In addition, as the stable growth policy is implemented, market credit demand will also increase. Taking all factors into consideration, the central bank may still cut the reserve requirement ratio in the second half of the year.

Wen Bin believes that the central bank will use a combination of open market operations and monetary policy tools to carry out adjustments and maintain a reasonable level of market liquidity. MLF, OMO increase and renewal, and reserve requirement ratio cuts are all in the policy toolbox.

Dong Ximiao believes that at present, my country's economic downward pressure is still relatively large, and the market is calling for a rate cut. After the implementation of measures such as rectifying "manual interest supplements" and reducing deposit rates, the bank's liability costs have declined. In the next step, there is still a possibility of reducing LPR and promoting a steady decline in financing costs. From an external perspective, the United States will implement an interest rate cut in September, and the external pressure on the RMB exchange rate may be reduced. Taking into account internal needs and external changes, it is expected that the central bank will implement a comprehensive reserve requirement ratio cut of 0.25 to 0.5 percentage points in the third quarter; the policy interest rate may be reduced by 10 to 15 basis points in the fourth quarter, pushing the LPR down simultaneously.

(This article comes from China Business Network)