China Injects 300 Billion Yuan Into Its Banking System Through An MLF Operation.

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

China injects 300 billion yuan to stabilize its economy

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

This operation represents a partial renewal, 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 on the part of 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 ample liquidity while avoiding excessive expansion of the central bank’s balance sheet.

A monetary strategy in a tense economic and geopolitical context

China’s accommodative monetary policy pursues several simultaneous objectives: helping banks increase their credit supply, facilitating the issuance of government bonds, and stabilizing market expectations. These measures are part of a broader effort to support an economy that struggles 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 estimate that the PBOC should maintain this accommodative stance in the coming months. The current level of MLF rates, combined with other tools like banks’ reserve requirements, should continue to support adequate 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) into its state banks, the largest since the 2008 crisis. Faced with falling banking profitability and geopolitical tensions with Washington, China is intensifying its efforts to stabilize its financial system and support its weakened economy.

Fenelon L.

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