PBoC tweaks lending facility as framework reform continues

The People’s Bank of China has made slight tweaks to its medium-term lending facility (MLF), thereby continuing the reform of its monetary policy framework.

The PBoC yesterday (March 24) announced that the MLF – whereby banks can borrow from the central bank for a year with qualified collateral – would be operated through “variable-rate tenders with a fixed quantity in the form of multiple-price auction” beginning this month.

This means banks will be able to borrow via the MLF at a dynamic price rate through a bidding process. Previously, the PBoC set a fixed MLF rate.

The central bank said it had tweaked the MLF to “keep liquidity adequate in the banking system” and to “better meet the differentiated funding needs of participating financial institutions”.

The changes could in effect lower borrowing costs for Chinese lenders as the market rate in recent years had been lower than the MLF, which was 2% before yesterday’s announcement. The interest rate on one-year AAA-rated negotiable certificates of deposits – a benchmark rate for interbank borrowing – was around 1.9% yesterday.

The PBoC also announced yesterday that it would issue 450 billion yuan ($62 billion) of one-year loans through the MLF today. With 387 billion yuan of MLF loans set to expire this month, the operation would add 63 billion yuan of liquidity to the banking system – the first net injection since July 2024.

Ming Ming, chief economist at investment bank Citic Securities, said this was the first time the PBoC had announced information about MLF operations a day in advance. Previously, the bank had always published details of the operations after they had taken place.

“The MLF operations this time around reflect the policy objective of signalling easing and stabilising market expectations,” Ming and his team of analysts wrote in a note.

He said the mismatch between the MLF and interbank rates should create room for the former to be lowered. He added that the move to dynamic pricing had effectively removed the MLF’s role as a central bank policy rate.

China’s central bank has been moving away from using the one-year MLF rate as a key policy rate since June of last year, when it indicated that the seven-day repurchase rate would take on a bigger role as its “short-term operational rate”.

This moves the PBoC closer to other central banks in major economies, which mainly use short-term rates as policy rates. For example, the US Federal Reserve’s federal funds rate and the Bank of England’s bank rate are both charged to banks for overnight lending.

The PBoC’s seven-day repo rate currently stands at 1.5%. The bank has repeatedly stated in recent weeks that it will cut interest rates and reserve requirement ratios “at an appropriate time”.