People’s Bank of China drains liquidity with MLF operation

Market analysis and insights from Stephen Innes, Chief Global Market Strategist at Axi,

There have been some aggressive buying interests in CNH 1y reportedly from Chinese names since yesterday afternoon and continues to see bidding interest across the CNH curve.

The buying comes after the People’s Bank of China (PBoC) announced that the Medium-Term Lending Facility (MLF: CNY300 bn) and targeted medium-term lending facility (TMLF: CNY240.5 bn) maturing in January will be rolled over with a CNY500 bn MLF operation at one go – an official confirmation of a net drain of medium-term liquidity from the system.

This unexpected shift by the PBoC is compounding the soggy feel to the global market that seems to be in the backup mode.

Indeed it could be one of those ” sell-off Fridays” where the economic reality sets in that despite how much stimulus you lavish at the Main street when the economy is still labouring due to the pandemic. It’s less meaningful than if folks were out and about fully vaccinated and “footloose and fancy-free”. That day will become but evidently not today.

This unexpected move by the PBoC may hint that the central bank’s monetary easing of the past year may be ending (though gradually).

While the loose policy has helped repair sentiment in China’s stock and rates market, injecting too much liquidity risks further stoking leverage in the financial system.

China’s macro leverage ratio has gone up more than 20% last year, and Beijing is now working hard to keep things under control. Today’s net liquidity withdrawal by the PBoC coupled with the below-expectations December TSF, could be one of the very first signals of China’s deleveraging work.