China's central bank injected fresh funds through a medium-term lending facility on Friday while keeping a tight rein on short-term funding in what appeared to be a further effort to dampen speculative investment while keeping the economy adequately funded. The central bank said it had skipped daily open market operations on Friday, marking the fifth day in two weeks that it has declined to inject funds into the system via its usual route.
But it provided generous 459 billion yuan ($66.52 billion) into the financial system via medium-term lending facility (MLF), more than compensating for some MLF loans that matured last week and some set to mature next week. "They are more willing to provide slightly longer term facilities because they think that would be feeding through into more productive economic areas," said Frances Cheung, Head of Rates Strategy for Asia ex-Japan at Societe Generale in Hong Kong.
"They don't want to send an easing signal across the board, but they don't want to really squeeze the market that hard. So it is kind of creating a neutral to a mildly tightening condition in the market," Cheung said. That policy is in keeping with China's major aim this year of curtailing financial risks and overall leverage in the economy, and the People's Bank of China has been managing short term cash conditions very closely this year.
In April, it skipped open market operations for 13 straight days. This week, there has been a net drain of 120 billion yuan ($17.39 billion) through reverse bond repurchase agreements from the market, following a meagre net injection of 10 billion yuan in the previous week. Last week, the central bank didn't roll over 230 billion yuan of maturing six-month funding through MLF loans, while another batch of 179.5 billion yuan worth of six-month MLF loans is due to mature on May 16. That means Friday's MLF lending leaves the market with a fresh injection of 49.5 billion yuan of funds.
The PBOC lent 66.5 billion yuan in six-month maturities and 392.5 billion yuan in one-year maturities. Interest rates for the MLF loans were unchanged at 3.05 percent for six-month loans and 3.20 percent for one-year loans, the People's Bank of China (PBOC) said in a statement on its website. "The ongoing liquidity tightening has led to visible adjustments in domestic financial asset markets, particularly those of bonds and commodities," CICC said in a note on Thursday, adding growth momentum also appears to have softened since April.
Yields on the benchmark 10-year government bond hovered at 3.67 percent on Friday morning, not far away from a two-year high of 3.72 percent hit a day earlier. The yields have already climbed more than 60 basis points this year. Two-year yields at 3.588 percent have risen around 80 basis points so far in 2017, leaving the yield curve extremely flat. Yields have risen steadily this year as cash conditions in the money market tightened and concerns grew about tougher regulation and the government's crackdown on shadow banking and risky financial practices, traders said.