(Yicai) Aug. 25 -- China’s central bank ramped up its medium-term liquidity operations in August, deploying a mix of medium-term lending facility loans and reverse repos to deliver the biggest monthly net injection in the past six months. Liquidity will likely stay loose in the near term, but reductions to banks’ reserve requirement ratios or interest rates will probably be pushed back as the People’s Bank of China prioritizes implementing existing policies, analysts said.

The PBOC pumped CNY600 billion (USD83.8 billion) of liquidity into the banking system today through MLF loans, as per its announcement on Aug. 22. The MLF operations offset CNY300 billion in maturing loans, meaning the bank has used the facility to introduce an additional CNY300 billion of liquidity this month, marking the sixth monthly increase in a row.

On the same day, the central bank also added CNY300 billion via reverse repos, bringing the net injection of medium-term liquidity this month to CNY600 billion, twice the amount in July and the largest net injection since February.

There are three main reasons for the recent steady injections of medium-term liquidity, said Wang Qing, chief macroeconomic analyst at Golden Credit Rating International. First, the government is in the midst of a peak period of bond issuance and the PBOC’s moves show coordination between monetary and fiscal policy, which helps channel more credit into the economy.

Second, impacted by anti-monopoly measures, a stronger stock market and rising medium- to long-term interest rates, liquidity in the banking system has tightened. More lending by the PBOC through policy tools such as MLFs helps stabilize expectations and ensure there is ample liquidity in the markets.

Finally, the central bank’s continued infusion of medium-term liquidity sends a clear signal that there is strong monetary policy support and that quantitative monetary policy tools are taking effect, even though the economy has been strong and stable in the first half.

The PBOC will continue to monitor conditions closely in the second half to ensure a supportive monetary environment for economic recovery, said Wen Bin, chief economist at China Minsheng Bank. Although the central bank did not explicitly mention tools such as ‘reserve requirement ratio,’ ‘open-market operations,’ ‘MLF,’ ‘re-lending’ and ‘rediscount’ in its second-quarter monetary report, this does not mean that a RRR cut will not be implemented before the end of the year. It may be that this stance gives the central bank more space to maneuver, and it could even restart treasury bond purchases if needed.

Policies will increasingly focus on making sure that funds are used efficiently and on supporting the virtuous cycle between the economy and finance, said Ming Ming, chief economist at CITIC Securities. Monetary easing is likely to continue, given the PBOC’s early move in August to switch open-market operations into net injections, the supportive stance on government bond issuance after value-added tax was reinstated and the timely use of reverse repos.

Editor: Kim Taylor