China's open market: The central bank's net injection during the tax period remains active, and MLF is also oversubscribed, with policy stabilization efforts continuing unabated

Updated Version 1 - China's Open Market: During the tax period, the central bank's net injection remains active with MLF also significantly renewed, and policy stabilization efforts continue unabated.

During the tax period, the central bank's reverse repos continue to provide net injections without withdrawal.

This week has turned into a net injection, with a cumulative scale of 460 billion yuan.

Liquidity during the tax period shows some tightening but remains stable.

Coordinated reduction in deposit and loan interest rates and significant renewal of MLF.

Safeguarding economic stability and growth, it is expected that policy stabilization efforts will continue unabated.

New charts and more comments.

Reuters Shanghai, May 23 - Following the recent round of monetary easing with interest rate cuts and reserve requirement ratio reductions, this week during the tax period, the central bank's reverse repos continue to provide net injections without withdrawal, while also linking the reduction in loan prime rate (LPR) and significantly renewing medium-term lending facilities (MLF), ensuring steady growth and calming expectations with policy efforts "in full swing." Liquidity during the tax period shows some tightening but remains stable, and it is expected that policy stabilization efforts will continue unabated.

"The major banks are still lacking liabilities, and there is a lot of supply of interest rate bonds this month, so the central bank needs to provide sufficient injection," said Yang Hao, a fixed income analyst at Nanjing Securities. He believes that the large amount of maturing reverse repos this month means that the central bank's actual net injection may not be very large.

Earlier, the central bank conducted a 142.5 billion yuan seven-day reverse repo operation, with the rate still at 1.40%, and the bidding amount continued to match the winning amount. The scale of this operation has decreased compared to the previous day. Based on this, the open market has seen a net injection for six consecutive days, with today's scale at 36 billion yuan, and a cumulative net injection of 460 billion yuan this week. If MLF operations are included, the central bank's cumulative net injection this week amounts to 960 billion yuan.

In May, the central bank renewed 500 billion yuan of medium-term lending facilities (MLF), which still significantly exceeds the maturing amount. Market participants indicate that after the reserve requirement ratio reduction, the central bank continues to maintain a considerable level of MLF operations. On one hand, the amount of maturing reverse repos this month remains large, and on the other hand, in light of external environmental uncertainties, the central bank continues to maintain a stabilizing stance.

"After the reserve requirement ratio reduction, so much MLF was renewed, but today, with tax payments starting, there is a bit of tightness in funds," said a trader from a brokerage in North China. However, it is just the normal tightness during the tax period, and we will see how much reverse repos are renewed later.

In May, the loan market quoted interest rate (LPR) broke the six-month stability, with a 10 basis point rate cut, and the linked deposit rates were also adjusted downwards, balancing the stability of banks' net interest margins and economic growth. Analysts believe that following the previous rate cut of the seven-day reverse repo rate, the LPR cut this time is not surprising, and the extent is relatively conservative.

They also pointed out that although the China-U.S. trade war has temporarily entered a ceasefire mode, challenges facing the domestic economy have not been eliminated. The effects of the monetary policy adjustments in May, including reserve requirement ratio cuts and interest rate reductions, still need to be released, and macro policies to support economic growth cannot be relaxed. There is still room for LPR reductions under the continued monetary easing rhythm in the second half of the year.

This week, a total of 486 billion yuan of reverse repos are maturing in the open market, with 106.5 billion yuan maturing today; in addition, the central bank and the Ministry of Finance conducted a total of 240 billion yuan in two phases of treasury cash deposit bidding on Tuesday, with interest rates for both terms falling below 2%, with the three-month term reaching a nearly 16-year low. Market participants pointed out that following the central bank's previous double cuts (reserve requirement ratio and interest rate), the fixed deposit rates also followed the reduction in bank deposit rates The People's Bank of China (PBOC) net withdrew 350.1 billion yuan in the open market last week, marking the second consecutive week of net withdrawal. However, the first reserve requirement ratio (RRR) cut of the year was implemented during the same week, releasing approximately 1 trillion yuan in long-term liquidity, effectively offsetting multiple funding disturbances such as government bond payments and the maturity of Medium-term Lending Facility (MLF).

Market participants indicated that the combination of the RRR cut and the flexible operations of the central bank in the open market still reflects a moderately accommodative monetary policy stance. Additionally, with the policy interest rates being lowered last week, the May Loan Prime Rate (LPR) is also expected to decline in tandem.

They also noted that the results of the tariff negotiations between China and the United States exceeded expectations. With a series of policy measures, including RRR cuts and interest rate reductions, China's economic contraction in the second quarter may be avoided. In the short term, the focus will be on observing the effects of these policies, and no significant stimulus measures are expected to be introduced.

This week's details of the central bank's fund injection and withdrawal (unit: billion yuan)