China’s central bank tackles cash crunch in biggest-ever medium-term injection

Bloomberg

The People’s Bank of China (PBOC) made the biggest-ever injection of Medium-term Lending Facility funds, in a move that analysts described as further evidence of a shift to monetary easing.
The PBOC skipped adding funds via seven-day reverse repurchase agreements on Monday while offering 502 billion yuan of its loans with one-year maturity to major banks in the open market. That’s the most in such an operation since the MLF was introduced in 2014.
Amid an escalating trade war and signs that the economy is slowing, policy makers are rolling out a series of tweaks to support funding to the private sector and in particular small businesses. The PBOC hasn’t yet explicitly said it is moving away from the current “prudent and neutral” stance and officials continue to focus on a multiyear debt cleanup spearheaded by President Xi Jinping.
That said, the central bank’s move towards monetary easing from the current neutral stance is evident with the size of the liquidity injection, and follows reports last week that the central bank asked lenders to invest in lower-graded corporate bonds in exchange for such funds, said Ming Ming, head of fixed-income research at Citic Securities Co. in Beijing.
Ming said the PBOC wants to offset the impact from previously tight credit, and he predicts the PBOC will cut reserve-requirement ratios one or two more times this year, with the next one coming in the third quarter.
The injection comes at a time when interbank liquidity is expected to ease further toward the end of a month, when fiscal expenditure usually accelerates. The yield on 10-year sovereign bonds and futures of the same maturity remained stable on Monday morning.
China is re-calibrating its policy stance as headwinds rise from trade tensions with the US and the negative impact of the debt campaign.

A formal change of direction on the anti-leverage campaign or an official shift to monetary easing could potentially come at meetings of the top political leadership to match tweaks already made.
China is still at the “initial phase” of monetary easing, and there’s room for the reserve requirement ratio to be cut further, to about 8 to 10 percent, said Nie Wen, an economist at Huabao Trust Co. in Shanghai.

“The PBOC hopes to soothe the tight credit situation as soon as possible while not hindering the debt curbing progress too much, but it’ll have to cut reserve ratios if the large injection of MLF loans doesn’t achieve the desired effects,” he said, adding Monday’s injection will postpone the next RRR cut to August.
The money multiplier, the ratio between broad money supply and the central bank’s base money, which gauges the pace at which banks are lending, fell back to 5.56 in June after rising to the highest level of 5.72 in the previous month on easing policy tweaks. The shift indicates banks remain reluctant to turn money offered by the central bank into loans to the real economy.
Liquidity conditions aren’t the constraint for credit expansion, and only “decisive and coordinated” policy adjustments on monetary, fiscal, and regulatory fronts can help neutralize the monetary conditions, Eva Yi, analyst at China International Capital Corp. wrote in a report.