PBOC conducts small net drain of medium-term liquidity, suggesting tightening bias

SHANGHAI: China's central bank conducted a small net drain in medium-term loans in the banking system on Friday and kept the rates on the facility unchanged, a move investors say suggests a shift to a tightening bias in monetary policy.

The People's Bank of China (PBOC) said in a statement it injected 500 billion yuan ($77.28 billion) worth of one-year medium-term lending facility (MLF) loans to financial institutions and kept the rate on the loans steady at 2.95% from previous operations.

That would mostly cover a batch of 300 billion yuan worth of MLF due to expire on Friday and another batch of TMLF with a value of 240.5 billion yuan maturing on Jan. 25, but leave a net drain of 40.5 billion yuan.

The central bank said the MLF injection was meant to "keep banking system liquidity reasonably ample", and Friday's operation was a rollover covering maturing MLF and TMLF loans due in January.

However, several traders said the small net drain indicates the central bank has started fine-tuning its monetary policy stance.

"500 billion yuan of fund injection versus 540.5 billion yuan of maturity ... PBOC's action emphasized the normalization commitment," said a trader at a foreign bank.

Expectations that the PBOC may prefer smaller liquidity fixes over more easing have strengthened since recent top policy meetings indicating scaled-back central bank support for the economy this year.

Authorities have signalled wanting to avoid sudden policy shifts and to keep economic growth within a "reasonable range".

Investors in China's money markets are scaling back bets for a cut to banks' reserve requirements before next month's Lunar New Year holiday, reflecting a belief that authorities will avoid strong easing signals in the midst of an economic recovery.

Separately, the steady MLF rate should indicate no change for the country's benchmark loan prime rate (LPR) at its monthly fixing next Wednesday.

The MLF, one of the PBOC's main tools in managing longer-term liquidity in the banking system, serves as a guide for the LPR.

In the same online statement, the PBOC also said it has injected another 2 billion yuan via seven-day reverse repos, with the rate unchanged.