The first medium-term lending facility (MLF) of the new year was released. According to the official website of the People's Bank of China, in order to maintain reasonable and sufficient liquidity in the banking system, on January 2024, 1, the People's Bank of China launched an open market reverse repurchase operation of 15 billion yuan and an MLF operation of 890 billion yuan, fully meeting the needs of financial institutions.

In addition, in terms of operating interest rates, the reverse repo operation rate is 1.8%, and the MLF operation rate is 2.5%, both of which are the same as before, which also disappoints the market's interest rate cut expectations. Some analysts pointed out that the People's Bank of China has reasonably increased the investment of MLF and released and strengthened efforts to stabilize growth, which is intended to guide financial institutions to increase support for weak links and key areas of the real economy. After the double force of credit and fiscal in the first quarter, if the reading of high-frequency economic indicators continues to weaken, the possibility of subsequent interest rate cuts cannot be ruled out.

and then put more than one trillion yuan into the market

Based on the scale of MLF and reverse repurchase operations, the People's Bank of China (PBOC) put a total of 1,15 billion yuan into the market on January 10840. On the same day, 500 billion yuan of reverse repos expired, and another 7790 billion yuan of 1-year MLF expired on January 1. This operation has a net medium and long-term liquidity of 16 billion yuan into the market.

Since 1, the People's Bank of China (PBoC) has over-renewed MLF for 2023 consecutive months. However, in November 13, the People's Bank of China (PBoC) achieved a net investment of 2023 billion yuan in MLF operations, and then further increased the net investment scale to 11 billion yuan in December, reaching a new high this year. Compared with the scale of the increase in the previous two months, the scale of the increase in MLF in January 6000 has been reduced.

In response to the operation of the People's Bank of China, Wen Bin, chief economist of China Minsheng Bank, analyzed the reasons from two aspects. Wen Bin pointed out that although under the guidance of the policy of "balanced delivery and smooth fluctuations", the "good start" of credit in January 2024 may weaken year-on-year, but considering the historical law of "early delivery and early return", and the Spring Festival effect in 1 is mainly in February, the disturbance to credit delivery in January is limited, so the endogenous momentum of new loan delivery in January is still strong, which will form a certain consumption of excess reserves. Since the beginning of the year, the interest rate of bills has fluctuated and risen rapidly, which also confirms to a certain extent that the credit supply is not weak.

On the other hand, Wen Bin said that January is a traditional month for tax payment, and the government collects more and spends less. The 1th is the deadline for the declaration of major taxes such as value-added tax and income tax, and the next two working days are the peak period for payment, and the disturbance of the tax period will increase. Considering that there may be a time lag between government bond issuance and hedging, the MLF excess renewal helps to hedge the impact of liquidity fluctuations and smooth the tax period on the capital side.

Zhou Maohua, a macro researcher at the Financial Market Department of Everbright Bank, pointed out that the People's Bank of China (PBoC) has reasonably increased the allocation of MLF and released greater efforts to stabilize growth, which is intended to guide financial institutions to increase support for the weak links and key areas of the real economy, which will help boost the market's confidence in economic recovery. At the same time, structural tools can help improve the precision and efficiency of policy implementation and promote the balanced allocation of credit.

Interest rates remain unchanged

Previously, affected by factors such as weakening fundamentals, slowing inflation and monetary policy's focus on prices, the market gave high expectations for interest rate cuts, and it was widely expected that the MLF and reverse repo sequels on January 1 will open the interest rate cut window again. However, from the perspective of operating interest rates, the expectation of an interest rate cut this month has been disappointed.

Looking back at the performance of MLF interest rates in 2023, the People's Bank of China (PBoC) lowered the MLF bid rate twice in June and August 2023, with a cumulative reduction of 6 basis points. Since then, the MLF rate has remained unchanged at 8.25% for five consecutive months.

Although the People's Bank of China did not cut interest rates in January, which slightly exceeded market expectations, some analysts pointed out that although the probability of interest rate cuts is relatively high, this is not a definitive event before the policy is implemented. And if the short-term interest rate cut expectations are disappointed, it is not bad for the market.

"At present, the policy is mainly about quantity and not price. Zhou Maohua pointed out that the recently released data as a whole reflects that China's economy continues to recover, the financial data in December 2023 ended smoothly, and the new loans for the whole year increased moderately, reflecting that the current market interest rate is in a reasonable range as a whole. On the other hand, at the beginning of the year, banks actively promoted credit easing, and there were many disruptive factors in the issuance of government bonds and short-term funds, and the market demand for liquidity was relatively large.

Ming Ming, chief economist of CITIC Securities, also mentioned that the People's Bank of China has recently helped reduce costs through structural tools such as PSL, and stable interest rates are also conducive to keeping bank spreads stable.

Wen Bin bluntly said that the current liquidity pressure is not too large, and the need to speed up the implementation of the RRR cut is not strong. Considering that the current slope of economic recovery is not high, and under the smooth release of credit, the decline in the speed of government bond issuance, and the gradual allocation and use of fiscal funds in the early stage, the capital level still maintains a stable balance. Under the gradual narrowing of the space for RRR reduction and the consideration of anti-fund idling arbitrage, the RRR reduction operation is estimated to be a little behind. "OMO+MLF Excess Sequel" can better hedge the current liquidity disturbance factors and keep liquidity at a reasonable and sufficient level.

In addition, Wen Bin believes that the current market interest rate is still above the policy interest rate, and the need to stabilize the exchange rate is still there. The recent work conference of the People's Bank of China once again mentioned the need to "take into account the internal and external equilibrium" in prices, which also means that the monetary policy will still take into account the disturbance of exchange rates and overseas factors to a certain extent.

It is expected that the timing of the RRR cut will fall in March and April

Based on the anchoring effect of the MLF interest rate, the MLF interest rate has "stood still" this month, which also makes the market have more expectations for the upcoming new loan prime rate (LPR) to remain unchanged.

In Zhou Maohua's view, the LPR interest rate is expected to remain stable this month. Mainly this month, the MLF rate, which is the anchor of the LPR interest rate pricing, remained stable. At the same time, the net interest margin of some banks is under greater pressure, and banks may need to cooperate with the People's Bank of China through monetary policy tools + reform means to give benefits to the real economy and promote further downward loan interest rates.

On January 1, the People's Bank of China (PBoC) said that it would strengthen counter-cyclical and cross-cyclical adjustments, and make efforts in terms of aggregate, structure and price to create a good monetary and financial environment for high-quality economic development. In terms of aggregate volume, we will make comprehensive use of base money delivery tools such as open market operations, medium-term lending facilities, re-lending and re-discounting, and reserves, to provide strong support for the scale of social financing and the reasonable growth of monetary credit. At the same time, it is necessary to prevent the accumulation of funds, guide financial institutions to strengthen liquidity risk management, and maintain the smooth operation of the money market.

Based on the statement of the People's Bank of China, Wen Bin analyzed that in the process of adhering to the "establishment and breaking", the total, structure and price-based tools will continue to work together to make decisions and improve efficiency. After the double force of credit and fiscal in the first quarter, if the reading of high-frequency economic indicators continues to weaken, the possibility of subsequent interest rate cuts cannot be ruled out. At the same time, referring to the frequency of previous years, it is expected that the timing of the RRR cut will most likely fall in March and April.

Zhou Maohua also mentioned that considering the internal and external macroeconomic trends, it is expected that the follow-up interest rate cuts, RRR cuts, and structural tools are still in the toolbox. From the point of view of time, the policy will be forward-looking to promote the recovery of the economy as soon as possible, and the market still expects the People's Bank of China's policy to be forward-loaded in the first quarter of 2024.

Dong Ximiao, chief researcher of Zhaolian, predicts that in the first quarter, the central bank may still reduce the policy rate by 5-10 basis points and reduce the deposit reserve ratio by 0.25 percentage points, further reduce the cost of funds for banks, and guide the LPR, especially the LPR with a maturity of more than 5 years, to decline moderately, help reduce the financing cost of operating entities and stimulate effective financing demand, laying the foundation for a good start and continuous recovery of the economy in 2024.

Beijing Business Daily reporter Liao Meng