The central bank's "peak shaving and valley filling" continues with an additional 500 billion yuan MLF. In March, mid-term liquidity experienced net withdrawal, and cross-season funding rates may fluctuate slightly.

The central bank will conduct a 500 billion yuan MLF operation tomorrow, marking the 13th consecutive month of increased issuance. The increase amount is smaller than last month’s 300 billion yuan. In mid-March, liquidity saw net drainage, the first time since October 2024. What signal does this release?

In recent months, the central bank’s liquidity management has shown characteristics of fine-tuned adjustments. Several experts told Caixin Media (a reporter from Caixin) that since March, multiple liquidity tools have been dominated by net drainage, which does not necessarily mean tighter liquidity. It may be related to the fact that, since March, funding conditions have remained somewhat abundant. “We believe this is an active adjustment based on the persistent abundance of funding in the banking system, reflecting the central bank’s precise approach—‘cutting peaks and filling troughs,’ avoiding funding hoarding and idle churn.”

Some industry participants said that March, as a quarter-end month, may lead the central bank to increase support for the market to offset pressure on funding conditions. “Although there are cross-quarter factors affecting March, we believe that funding rates may fluctuate, but the range is expected to be controllable. The overnight rate may fluctuate around 1.4%.”

In March, net drainage from multiple liquidity tools; liquidity steady and balanced

On March 24, the central bank issued an announcement stating that to keep liquidity in the banking system ample, on March 25 the People’s Bank of China will conduct a 500 billion yuan MLF operation with a fixed quantity, interest-rate tender, and a multiple-price bidding process, with a maturity of one year.

Because 450 billion yuan of MLF matures in March. This means that in March, the MLF rollover will include an additional issuance of 50 billion yuan, the 13th consecutive month of increased issuance, with the increase amount smaller than last month’s 300 billion yuan. In addition, in March, the two repo-with-buyout reverse repo varieties totaled net drainage of 300 billion yuan, showing net drainage of 250 billion yuan for mid-term liquidity in March.

Dong Ximiao, Chief Economist of Zhoulian and Deputy Director of the Shanghai Finance and Development Laboratory, told Caixin Media that this does not imply tighter liquidity. Instead, it is the central bank’s decision after taking a comprehensive assessment of the total amount of maturing funds on the day, the current liquidity level in the market, and the trend in future funding conditions.

Wang Qingdui, Chief Macro Analyst at Orient Securities, told Caixin Media that this may mainly be related to the fact that the net injection scale of mid-term liquidity in the first two months of the year was as high as 1.9 trillion yuan, and funding conditions have continued to remain somewhat abundant in March. This does not mean that the central bank will continue to tighten medium- and long-term liquidity.

Zhao Yi, a fixed-income analyst at CITIC Securities, said that judging from liquidity conditions, since this year’s Spring Festival, the liquidity market has been generally loose overall, and liquidity supply and demand have remained broadly balanced. Since March, several long-end liquidity tools have mainly shown net drainage. In addition, recent geopolitical conflicts have raised inflation-related imported risk for China. Monetary policy may be arranged more reasonably by combining internal and external balance, making total-amount operations more steady.

Mingming, a research analyst at CITIC Securities, said that recently the central bank has shown characteristics of refined and targeted liquidity management. In March, the total net drainage from the repo-with-buyout reverse repo amounted to 300 billion yuan, the first time since June 2025. “We believe this is an active adjustment based on the persistent abundance of funding in the banking system, reflecting the central bank’s precise approach of ‘cutting peaks and filling troughs,’ avoiding funding hoarding and idle churn. Given that the tone for monetary policy remains steady and accommodative, and if funding conditions are tightened later due to factors such as government bond issuance, we expect the central bank will still flexibly use quantity-based tools to address potential liquidity pressures.”

Overall, looking at this week, external disruptions to funding conditions are mainly concentrated in the first half of the week, while cross-quarter impacts in the second half will gradually become apparent. Xiao Jinchuan, Chief Joint Macro Analyst at West China Securities, said that this week, public market operations had total maturities of 19k yuan; among them, reverse repos matured at 242.3 billion yuan. As the cross-quarter period approaches, combined with increased pressure from government bond payment collections, funding conditions may see slight fluctuations. At the same time, starting from the 25th, lending 7-day funds can cross the quarter.

Overnight rates fluctuate slightly; lowering the reserve requirement ratio lands better than cutting rates

Considering that this Wednesday enters the cross-quarter period, what kind of impact will the central bank’s recent net-drainage adjustments have on funding conditions?

Su Zijixuan, Head of Centralized Trading at Qingyin Wealth Management, said that March is a quarter-end month. She expects the central bank may increase support for the market to offset pressure on funding conditions. Within this week, the central bank once again stated that it will continue to implement appropriately accommodative monetary policy, firmly maintain the stable operation of financial markets such as stocks, bonds, and foreign exchange. The market still believes that lowering the reserve requirement ratio will be prioritized over cutting interest rates.

“Although March has cross-quarter factors, we believe funding rates may fluctuate, but the range is expected to be controllable. The overnight rate may fluctuate around 1.4%.” Su Zijixuan said.

“With current funding conditions showing strong resilience, the price of 14-day funds that can cross the quarter is also maintained at a relatively comfortable level of 1.54%, providing support for smooth cross-quarter operations. We expect that the upward move of 7-day funds on the 25th can be controlled within 10 BP.” Xiao Jinchuan believes.

Does net drainage of medium-term liquidity imply that lowering the reserve requirement ratio is coming? Generally speaking, there is some substitution relationship between medium-term liquidity injection tools and long-term liquidity injection tools such as lowering the reserve requirement ratio and government bond purchases/sales. At the same time, the timing of lowering the reserve requirement ratio also needs to be judged by looking at the macroeconomic and financial outlook.

Wang Qing said that since the end of February, developments in the Middle East situation have driven a sharp surge in international oil prices, and in March China’s overall price level has shown a strong upward trend. This may also create some disturbance to the growth momentum of the economy. In the short term, during a period when external uncertainty rises sharply, China’s monetary policy is likely to focus on maintaining ample liquidity and stabilizing market expectations. At the current stage, the policy focus will shift somewhat toward controlling prices from rising too fast, so operations such as lowering the reserve requirement ratio and cutting interest rates may be appropriately delayed.

“Currently, China’s weighted average reserve requirement ratio for deposits is 6.3%, and there is still considerable room for lowering the reserve requirement ratio. Therefore, the reserve requirement ratio cut should be implemented first, with an intensity that can be greater than 0.5 percentage points in 2025, to create conditions for a decline in the LPR.” Dong Ximiao said.

This article is republished from: Caixin Media; Zhitong Finance editorial: Chen Xiaoyi.

A massive amount of information and precise analysis—available in the Sina Finance app