The central bank continued to make 995 billion yuan of MLF at the beginning of the year, and there are still expectations for a RRR cut and interest rate cut in the first quarter

Source of this article: Times Weekly Author: Cao Meng

On January 15, the People's Bank of China (hereinafter referred to as the "central bank") launched a medium-term lending facility (MLF) operation of 995 billion yuan, and the winning interest rate remained unchanged at 2.5%. Wind data shows that 779 billion yuan of MLF expired this month, achieving a net investment of 216 billion yuan. This is also the 13th consecutive month that the central bank has continued to increase MLF since last year, with a cumulative net investment of 2,741 billion yuan.

Source: People's Bank of China

The central bank said that the MLF is to maintain reasonable and sufficient liquidity in the banking system and fully meet the needs of financial institutions.

Wen Bin, chief economist of China Minsheng Bank, told the Times Weekly reporter that the central bank continued to over-renew the MLF at the beginning of the year, achieving a net investment of 216 billion yuan, mainly due to the fact that the credit "good start" in January is expected to increase the consumption of excess reserves, and at the same time, the superimposed disturbance of financial factors in January has a certain pumping effect on the capital side.

The central bank has continued to over-renew MLF

According to the announcement of the central bank's open market business transactions, in November and December 2023, the central bank will carry out 1.45 trillion yuan of MLF respectively, both of which will be net at parity. Among them, in December 2023, the net investment volume of MLF reached 800 billion yuan, setting a new high in the net investment volume of excess continuation in 2023.

Image source: Wind

At the beginning of 2024, the central bank continued to renew the excess MLF, which is the 13th consecutive month of incremental MLF since last year, and has invested a total of 2,741 billion yuan to continue to provide medium-term liquidity for the market. Up to now, the ending balance of MLF has exceeded 8 trillion yuan, which is at an all-time high.

Wen Bin said that although under the guidance of the policy of "balanced delivery and smooth fluctuations", the "good start" of credit in January this year may weaken year-on-year, but considering the historical law of "early delivery and early return", and the Spring Festival effect this year is mainly in February, the disturbance to credit delivery in January is limited, so the endogenous power of new loans in January is still strong, which will form a certain consumption of excess reserves. With the addition of PSL and the introduction of financial support policies for the housing rental market, the "three major projects" will be accelerated, driving the medium and long-term loans of enterprises to stabilize at a high level. The excess renewal of MLF will help enhance the stability of funds in the banking system and guide the increase of support for the real economy.

In addition, Wen Bin believes that because January is a traditional tax payment month, the central bank will continue to exceed the MLF. Generally, the 15th of each month 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 of payment, and the disturbance of the tax period increases. However, the allocation of government bond funds issued in the early stage and the landing and use of 500 billion yuan of construction bonds will also hedge some disturbances. 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.

The expectation of interest rate cuts has been disappointed, what will be the follow-up monetary policy?

In January 2024, the central bank will continue to keep the interest rate unchanged for MLF, so the LPR quotation in January will most likely remain unchanged. Wind data shows that the MLF rate has been cut by a cumulative 80 basis points since it entered a downward channel in October 2019. Among them, the MLF will cut the interest rate twice in 2023, by 10 basis points and 15 basis points in June and August of that year, and by 25 basis points for the whole year, which is the largest reduction in recent years, second only to 30 basis points in 2020.

"Considering the impact of factors such as loan repricing at the beginning of the year, bank interest margins are still facing great pressure to narrow, and the internal motivation to spontaneously drive MLF-LPR interest rate cuts is weak. Wen Bin said that in December 2023, the bottom of prices stabilized, the growth rate of M1 stopped falling and flattened, imports and exports rebounded more than expected, and the overall new credit and social finance were still at a high level, indicating that the economy is in the process of a steady recovery.

In addition, Wen Bin also pointed out that the current market interest rate is still above the policy interest rate, the need to stabilize the exchange rate is still there, and the recent central bank work conference once again mentioned that the price should "take into account the internal and external balance", which also means that the monetary policy will still consider the exchange rate and overseas factors to a certain extent.

On January 8, the Cargo Administration Department of the People's Bank of China said that it would strengthen counter-cyclical and cross-cyclical adjustments, and make efforts from the three aspects 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.

Zhou Maohua, a macro researcher at the financial market department of Everbright Bank, analyzed that at present, the net interest margin of some banks is under great pressure, and banks may need to cooperate with the central bank's further monetary policy tools + reform measures to further benefit the real economy and promote the further decline of loan interest rates. From the perspective of time, the policy is forward to promote the recovery of the economy as soon as possible, and the market still has expectations for the central bank's policy in the first quarter.

At the same time, Wen Bin said for the follow-up monetary policy trend in 2024 that after the double force of credit and finance in the first quarter, if the reading of high-frequency economic indicators continues to weaken, it cannot be ruled out that the probability of subsequent interest rate cuts will increase. 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, and the interval between the same time will be about 6 months.