Pedestrians pass People's Bank of China headquarters in Beijing, China, January 7, 2019.
Giulia Marchi | Bloomberg | Getty Images
China's central bank expanded 200 billion yuan ($ 28.60 billion) through its medium-term lending facilities on Friday, the second time it has done so this month, while lending rates remained unchanged.
The move to add long-term funds caught the market off guard as the central bank had already injected funds last week.
Several traders said that the cash injection was likely a response to tighter liquidity in the interbank market as of late Thursday, which pushed up borrowing costs.
Nie Wen, an economist at the Hwabao Trust in Shanghai, said that the fund injection through MLF loans was to offset the lack of liquidity even after cuts relative to several reserve needs so far this year.
In the short term, high consumer inflation kept politicians from cutting interest rates immediately, he said.
"But it must at least free up liquidity to support economic growth, especially after October's weak credit lending data," Nie added.
"Consumer price growth is high, but the producer price index is still in a negative range. Corporate borrowing costs remain high."
Markets are looking for signs of liquidity stress following a government takeover of an Inner Mongolia bank and state rescue of other small banks this year, concerns over the health of hundreds of small lenders in the country resumed as China's economic growth slowed to nearly a 30 year low.
People's Bank of China (PBOC) said on its website on Friday that the interest rate on one-year MLF loans remained at 3.25%, the same as the previous operation.
A trader at a Chinese bank said the MLF injection suggests the new lending standard ̵
Last week, the central bank cut interest rates on MLF loans for the first time since February 2016, but only by marginal 5 basis points. It also injected 400 billion yuan into financial institutions through the liquidity tool.
The volume-weighted average interest rate for the seven-day repo-traded reference number traded in the interbank market – rated as the best indicator of general liquidity in China – jumped to a high of 3.4% on Thursday. It was the highest level since September 30, a day before a week-long holiday on National Day.
The seven-day repo rate fell to 2.7481% from 0330 GMT on Friday morning.
The PBOC said that MLF loans and funds released from the second phase of a targeted RRR cut off compensation factors, including the tax payment period, to keep the banking system's liquidity "reasonably rich".
Friday is the effective date of the second phase of a targeted reduction in the official reserves of commercial banks announced by the PBOC in September.
The central bank usually performs MLF operations when maturities are due, but no such loans or reverse repayments are due on Friday.