(Yicai) Oct. 27 -- China’s central bank carried out a net liquidity drain of CNY200 billion (USD30 billion) through its medium-term lending facility in October, marking the third such move this year following similar withdrawals in April and August. However, the reduction in MLF funding does not signal a shift toward tighter monetary policy, several market analysts said.

The People's Bank of China conducted a one-year MLP operation worth CNY700 billion (USD105 billion) yesterday, using a fixed-quantity, interest-rate tender with multiple winning rates. Public data show that CNY900 billion of MLF funds matured this month.

The smaller MLF rollover reflects a more targeted approach to liquidity management through a combination of short- and long-term instruments, the analysts said.

When other policy tools are taken into account, the central bank still injected a net CNY200 billion into the market through medium-term liquidity operations. Broad-based easing measures, such as interest rate cuts and reserve requirement ratio cuts, are likely to be postponed in the near term.

“Although the MLF recorded a net liquidity withdrawal of CNY200 billion in October, medium-term liquidity operations as a whole still saw a net injection for the fourth consecutive month,” said Wang Qing, chief macroeconomic analyst at Golden Credit Rating International. “The net injection stood at CNY200 billion, unchanged from the previous month.”

The PBOC infused a net CNY400 billion (USD60 billion) through three-month and six-month outright reverse repos in October, according to public data. This means that, despite the smaller MLP rollover, the combined net injection through medium- and longer-term liquidity tools still amounted to CNY200 billion for the month.

The moderate reduction in MLF lending should not disrupt government bond issuance, given the current steady pace of issuance, Wang said. It could also help guide money market interest rates towards a modest recovery and stabilize market expectations.

Since October, liquidity conditions have been very loose. The seven-day interbank repo rate (DR007) has hovered around 1.32 percent, while the overnight repo rate (DR001) has fallen to approximately 1.26 percent. Both rates are below the PBOC’s seven-day reverse repo rate.

The need for additional liquidity injections has diminished given the relatively ample supply of long-term funding, said Ming Ming, chief economist at CITIC Securities.

The CNY200 billion reduction in the MLF rollover should not be interpreted as a tightening of liquidity conditions, said Dong Ximiao, chief economist at Merchants Union Consumer Finance. Instead, it reflects a shift in liquidity management away from broad-based easing toward more targeted adjustments and better alignment of funding maturities.

Guiding liquidity conditions back toward a more neutral level is reasonable from the perspective of managing market expectations and preventing financial risks, said Tan Yiming, chief fixed-income analyst at TF Securities. A rapid decline in bond yields can lead to the accumulation of market risks. At present, there is little basis for a sharp move in either direction in money market interest rates.

Editor: Kim Taylor