Increasing the amount for the 13th consecutive month! The central bank conducted a 500 billion yuan MLF operation, corresponding to a net injection of 50 billion yuan.

Every reporter｜Zhang Shoulin Every editor｜Wei Wenyi

To maintain ample liquidity in the banking system, on March 25, the People’s Bank of China (hereinafter referred to as the “central bank”) conducted a 500 billion yuan MLF (Medium-term Lending Facility) operation through fixed quantity, interest rate bidding, and multiple price level winning methods, with a term of 1 year.

Image source: Central Bank official website

The reporter from “Daily Economic News” noted that 450 billion yuan of MLF is due in March, which means an increase of 50 billion yuan in MLF rollovers for March, marking the 13th consecutive month of increases. After the MLF operation was implemented in March, the MLF balance further increased to 7.3 trillion yuan. However, considering that there was a net withdrawal of 300 billion yuan from the reverse repurchase agreements in March, the combined total of MLF and reverse repos still remains in a net withdrawal state.

Wang Qing, chief macro analyst at Dongfang Jincheng, pointed out that this may mainly relate to the net liquidity injection of 1.9 trillion yuan in the first two months of this year and the continued relatively ample liquidity in March, and does not indicate that the central bank will continue to tighten medium- and long-term liquidity.

Market liquidity structure has been loose since this year’s Spring Festival

After the MLF operation, the combined net withdrawal of MLF and reverse repos in March will amount to 250 billion yuan.

In terms of liquidity conditions, the team of Mingming, chief economist at CITIC Securities, analyzed that the overall market liquidity has been loose since this year’s Spring Festival, with a generally balanced supply and demand for liquidity. Since March, the medium- and long-term liquidity has mainly been a net withdrawal.

Wang Qing believes that in the future, the central bank will comprehensively use tools such as the reserve requirement ratio, treasury bond buying and selling, MLF, and reverse repos for medium- and long-term liquidity management, to keep the funding situation relatively stable and ample.

“In order to ensure the funding needs for major projects in key areas and to expand effective investment, the new quota for local government debt for 2026 has been issued in advance. Additionally, the government work report confirmed that this year’s government bond financing scale will reach new heights, all of which suggest that the scale of government bond issuance will continue to be at a high level in March and the following period.” Wang Qing stated that with the completion of the issuance of 500 billion yuan in new policy-based financial instruments by October 2025, and the announcement in March to issue 800 billion yuan in new policy-based financial instruments mainly for investment expansion, these will continue to drive a large-scale issuance of supporting loans from banks in March and beyond. The subsequent issuance of policy and financial bonds will also significantly increase.

Wang Qing pointed out that all of the above will lead to a tightening effect on liquidity to some extent. Therefore, in response to the potential tightening of liquidity, it is necessary for the central bank to continuously inject medium- and long-term liquidity into the market through a combination of various policy tools, guiding the liquidity situation to remain relatively stable and ample. This also reflects a specific manifestation of the coordination between fiscal and monetary policies.

Rate cuts and reserve requirement reductions may be moderately postponed

Looking ahead, the Mingming team stated that recent geopolitical conflicts have raised the risk of imported inflation in China, and monetary policy may reasonably arrange total operations in combination with internal and external balances, leading to smoother operations. Attention should be paid to the marginal changes in subsequent fundamental data and the fluctuations in global capital markets, with an expectation that monetary policy will maintain a moderately loose tone.

So, does the net withdrawal of medium-term liquidity imply that a reserve requirement cut is imminent? Wang Qing analyzed that generally speaking, there is a certain substitutive relationship between medium-term liquidity injection tools and long-term liquidity injection tools such as reserve requirement cuts and treasury bond trading. Meanwhile, it is also necessary to consider the trends in the macroeconomic financial landscape when determining the timing of a reserve requirement cut. Since the end of February this year, the evolution of the Middle East situation has driven international oil prices significantly up, and the overall price level domestically saw a strong upward trend in March, which may also disturb economic growth momentum. “In the short term, as external uncertainties suddenly increase, domestic monetary policy is likely to focus on maintaining ample liquidity and stabilizing market expectations; the current policy focus may temporarily shift towards controlling rapid price increases, and operations such as reserve requirement cuts and interest rate reductions may be moderately postponed.”

Recently, Cheng Shi, chief economist at ICBC International, analyzed that as a macro-control tool centered on price signals, total policies can simultaneously affect both bank funding supply and micro-subject financing demand, making them more suitable for stabilizing inflation expectations and restoring total demand. From the operational orientation, the structural adjustments at the beginning of the year indicate that the policy easing in 2026 is more likely to be reflected in a mild and phased approach.

In terms of tool utilization, Cheng Shi predicts that quantity-type tools may be prioritized, maintaining reasonable liquidity through reserve requirement cuts and creating an environment for structural policies to take effect. Currently, the average reserve requirement ratio of financial institutions is about 6.3%, and there is still around 50 basis points of room for reduction. The use of price-type tools is relatively cautious; though there is objective room for interest rate cuts, it is more likely to adopt a gradual and moderate approach, dynamically assessing based on the effects of policy transmission. The 7-day reverse repo rate is currently at a historical low of 1.4%, but still has room for moderate adjustment of 10 to 20 basis points. On the central bank level, the market expectation of a moderate appreciation of the yuan provides some space for injecting liquidity. At the bank level, since 2025, the net interest margin has shown signs of stabilizing, maintaining at 1.42% for two consecutive quarters, and in 2026, a large scale of three-year and five-year deposits will mature and be repriced, releasing some space for interest rate adjustments. On a micro level, the new round of “two new” policies in 2026 (large-scale equipment updates and consumer goods trade-ins) will continue to support the expansion of domestic demand, including updating equipment for offline consumption infrastructure such as commercial complexes and shopping centers within the support scope, and enhancing the “subsidy rate” for key consumer goods, which will help boost confidence among enterprises and residents, thus improving the transmission efficiency of monetary policy.

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Cover image source: Every Media Asset Library