China Pumps 300 Billion Yuan Into Banking System via MLF Operation

The central bank of China has just conducted a significant medium-term lending operation to support its banking system. This injection of 300 billion yuan (approximately 41.83 billion dollars) is part of a broader strategy aimed at maintaining favorable liquidity conditions in an uncertain economic context.

China injects 300 billion yuan to stabilize its economy

The People’s Bank of China (PBOC) launched this Tuesday a medium-term lending facility (MLF) operation of 300 billion yuan with a maturity of one year. The interest rate applied remains stable at 2%, unchanged from previous operations, according to the official announcement published on the central bank’s website. This intervention occurs in a context where Beijing is actively seeking to stabilize its economy in the face of domestic and external challenges.

This operation represents a partial rollover, as 500 billion yuan of MLF loans are set to mature this month. After this latest injection, the total balance of MLF loans now reaches 4.09 trillion yuan. The difference between the amounts maturing and the recent injection reflects a calibrated adjustment by the Chinese monetary authorities.

Wang Qing, chief macroeconomic analyst at Golden Credit Rating, reminds us that the central bank had already conducted direct repos of 1.7 trillion yuan in January, equivalent to an early release of medium-term liquidity. This sequential strategy aims to maintain abundant liquidity while avoiding excessive expansion of the central bank’s balance sheet.

A monetary strategy in a tense economic and geopolitical context

The accommodative monetary policy of China pursues several simultaneous objectives: to help banks increase their credit supply, facilitate the issuance of government bonds, and stabilize market expectations. These measures are part of a broader effort to support an economy struggling to regain its pre-pandemic dynamism, particularly in the real estate and consumption sectors.

This MLF operation also occurs in a context of heightened trade tensions with the United States. Since Donald Trump’s return to the White House, Washington has imposed new tariffs on Chinese imports and threatened the BRICS group, of which China is a founding member, with punitive tariffs of up to 100%. In the face of these pressures, Beijing seeks to strengthen its internal economic and financial resilience.

Analysts believe that the PBOC should maintain this accommodative stance in the coming months. The current level of MLF rates, combined with other tools such as banks’ reserve requirement ratios, should continue to support sufficient liquidity to meet the financing needs of the real economy while avoiding overly aggressive measures that could destabilize the yuan.

In summary, this MLF operation of 300 billion yuan heralds more massive interventions to come. In September 2024, Beijing planned to inject 1 trillion yuan (142 billion dollars) into its state banks, the largest since the 2008 crisis. In the face of declining banking profitability and geopolitical tensions with Washington, China is intensifying its efforts to stabilize its financial system and support its weakened economy.