China's central bank adds liquidity via reverse repos, MLF

China's central bank injected liquidity into the banking system through reverse repos and medium-term lending facility (MLF) on Monday to keep liquidity reasonable and ample.

The People's Bank of China conducted 89 billion yuan (US$12.52 billion) of seven-day reverse repos at an interest rate of 1.8 percent.

A total of 995 billion yuan was also injected into the market via the MLF, which will mature in one year at an interest rate of 2.5 percent, unchanged compared with previous operation.

The operations aim to keep liquidity in the banking system reasonable and ample, the central bank said in a statement.

With 779 billion yuan worth of MLF loans set to expire this month, Monday's operation resulted in a net injection of 216 billion yuan in fresh funds into the banking system.

Wen Bin, chief economist at China Minsheng Bank, said the move aims to guide more funds into the real economy sector to support its development.

The steady MLF rate defied market expectations for a lower MLF rate and a reduction in commercial banks' reserve requirement ratio (RRR), and is likely to delay the RRR reduction, Wen said.

He noted that the liquidity pressure within the country's banking system remains mild, making it less urgent for the central bank to cut the RRR.

There is a widespread expectation that the central bank still has policy room for reductions in the RRR and benchmark interest rates. Wen forecasts that the first cut this year may occur in March or April.

Ming Ming, chief economist at CITIC Securities, said the MLF operation of the central bank also indicated the efforts to stabilize the exchange rate of the yuan.

A reverse repo is a process in which the central bank purchases securities from commercial banks through bidding, with an agreement to sell them back in the future.

The MLF tool was introduced in 2014 to help commercial and policy banks maintain liquidity by allowing them to borrow from the central bank using securities as collateral.