Thirteenth consecutive month of increases! Central bank conducts 5 billion yuan MLF operation, corresponding to net injection of 500 million yuan

To maintain ample liquidity in the banking system, on March 25, the People’s Bank of China (hereinafter referred to as the “PBOC”) conducted a 500 billion yuan Medium-term Lending Facility (MLF) operation through fixed amount, rate-based bidding, with multiple price points, maturing in one year.

Image source: PBOC official website

According to reporters from Daily Economic News, 450 billion yuan of MLF matured in March, meaning that the MLF rollover in March increased by 50 billion yuan, marking the 13th consecutive month of increased issuance. After the March MLF operation, the MLF balance further rose to 7.3 trillion yuan. However, combined with a net withdrawal of 300 billion yuan through outright reverse repos in March, the total of MLF and outright reverse repos still shows a net withdrawal.

Wang Qing, Chief Macro Analyst at Orient Securities, pointed out that this may mainly relate to the high net liquidity injection of 1.9 trillion yuan in the first two months of this year, and the continued relatively ample liquidity in March, which does not necessarily indicate that the PBOC will persistently tighten medium- and long-term liquidity.

Market liquidity has been relatively loose since the Spring Festival this year

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

From the liquidity perspective, Mingming’s team at CITIC Securities analyzed that since the Spring Festival, overall market liquidity has been relatively loose, with supply and demand generally balanced. Since March, medium- and long-term liquidity has mainly been net withdrawn.

Wang Qing believes that the PBOC will continue to use a combination of tools such as reserve requirement ratio (RRR) cuts, government bond trading, MLF, and outright reverse repos to maintain relatively stable and ample liquidity.

“To ensure funding for key projects and expand effective investment, the additional local government debt quota for 2026 was allocated early, and the government work report set a new high for government bond financing scale this year. This indicates that the issuance of government bonds will remain high in March and in the near future,” Wang Qing said. “With the completion of the 500 billion yuan of new policy financial instruments in October 2025, and the announcement of an 800 billion yuan issuance of new policy financial instruments in March mainly to expand investment, these will continue to drive large-scale lending by banks. Additionally, government and policy bank bond issuance will also significantly increase.”

Wang Qing pointed out that all these measures will, to some extent, tighten liquidity. Therefore, to address potential liquidity tightening, the PBOC needs to continuously inject medium- and long-term liquidity through various policy tools, guiding liquidity to remain relatively stable and abundant. This reflects the coordination of fiscal and monetary policies.

Potential delay of RRR cuts and interest rate reductions

Looking ahead, Mingming’s team stated that recent geopolitical conflicts have increased the risk of imported inflation, and monetary policy may be adjusted to balance internal and external factors, with more stable overall operations. They suggest paying attention to the marginal changes in economic fundamentals and global capital market fluctuations, expecting monetary policy to remain moderately accommodative.

So, does net medium-term liquidity withdrawal mean RRR cuts are imminent? Wang Qing analyzed that generally, there is a certain substitution relationship between medium-term liquidity tools and long-term tools such as RRR cuts and government bond trading. Meanwhile, the timing of RRR cuts depends on macroeconomic and financial trends. Since late February, evolving Middle East tensions have driven international oil prices sharply higher, and in March, overall domestic prices showed a strong upward trend, which could disturb economic growth momentum. “In the short term, amid rising external uncertainties, China’s monetary policy is likely to focus on maintaining ample liquidity and stabilizing market expectations; currently, policy efforts may temporarily tilt toward controlling rapid price increases, and RRR cuts or rate reductions could be delayed accordingly.”

Recently, ICBC International’s Chief Economist Cheng Shi analyzed that as a macroeconomic regulation tool centered on price signals, total policies can simultaneously influence bank funding supply and micro-level financing demand, making them more suitable for stabilizing inflation expectations and restoring aggregate demand. From an operational perspective, structural adjustments at the start of the year suggest that policy easing in 2026 will likely be moderate and phased.

In terms of tools, Cheng Shi believes that quantity-based tools may take precedence, such as RRR cuts to maintain reasonable liquidity, creating a favorable environment for structural policies. Currently, the average reserve requirement ratio for financial institutions is about 6.3%, with roughly 50 basis points (bps) of room for further reduction. Price-based tools, like rate cuts, are used cautiously; although there is room for small, gradual adjustments, they will be dynamically evaluated based on policy transmission effects. The 7-day reverse repo rate is already at a historic low of 1.4%, but still has room for a 10-20 bps adjustment. On the PBOC’s side, market expectations of a modest yuan appreciation provide some space for liquidity injection. Banks have seen their net interest margins stabilize at around 1.42% for two consecutive quarters since 2025, and in 2026, large-scale maturities and re-pricing of three- and five-year deposits will provide room for interest rate adjustments. On the micro level, the new round of “Two New” policies in 2026—large-scale equipment upgrades and consumer goods replacement—will continue to support domestic demand. Upgrades of offline consumption infrastructure like commercial complexes and shopping centers are included in support measures, and the “coverage rate” for key consumer goods will further improve, helping boost business and consumer confidence and enhancing the transmission efficiency of monetary policy.

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Cover image source: Daily Economic News media library