Caixin News, August 26th (Reporter Cao Yunyi) With the increase of disturbance factors in the financial market this week and approaching the end of the month, there may be fluctuations in the funds. Today, the central bank conducted more reverse repos and continued to conduct a moderate amount of MLF operations to jointly stabilize liquidity. Insiders pointed out that in the future, the regular MLF operations will be moved to a later date, which can better suppress the end-of-month volatility and further detach from LPR quotes.

With the US Federal Reserve releasing a clear signal of rate cuts, the monetary policy space in China has further opened up. Industry insiders believe that the policy interest rates in the fourth quarter will be further reduced. At the same time, it is not ruled out that the central bank may lower the reserve requirement ratio in the second half of the year.

Government bond issuance peak period, the central bank safeguards the end-of-month funds.

Previously, the central bank announced that it would continue to conduct the MLF operation that expires on August 15th. Due to the overlap of the peak period of government bond issuance and the tightening of liquidity at the end of the month, the central bank also increased the scale of fund injection today to effectively control the volatility of DR007.

Today, the central bank conducted a 471 billion yuan 7-day reverse repo operation in the open market, with an operating rate of 1.70%, the same as before. At the same time, the central bank conducted a 300 billion yuan 1-year MLF operation, and the bid rate remained unchanged at 2.30%. Data shows that 52.1 billion yuan of reverse repos will mature today, and 401 billion yuan of MLFs will mature in August.

"As we approach the end of the month this week, there is a tightening trend in the funds, and the central bank also needs to increase the scale of fund injection through open market operations to effectively control the volatility of DR007. This is the main reason why the central bank carried out a 471 billion yuan 7-day reverse repo operation today, with a net injection of 418.9 billion yuan," said Wang Qing, Chief Macro Analyst at Oriental Jin Cheng, to Caixin News.

In August, the scale of MLF operations was 300 billion yuan, 101 billion yuan less than the maturity scale of 401 billion yuan for the month. Why did the central bank reduce the scale of operations? Wen Bin, Chief Economist of Minsheng Bank, believes that after the interest rate cuts in July, the MLF rate is 2.3%, which is still relatively high compared to the interest rates of interbank certificates of deposit (On August 23, the yield of 1-year AAA interbank certificates of deposit was 1.96%). In this environment, reducing the scale of MLF operations better meets market demand.

Wang Qing also pointed out that besides the increased injection of reverse repo, the central bank conducted one MLF operation on July 25th with a scale of 200 billion. If the total scale of the operation on July 25th and today's operation is added up, the overall scale will be 500 billion, and the actual operation will be an incremental continuation of 99 billion. "Behind this is the peak period of government bond issuance, and monetary policy is increasing coordination with fiscal policy to control the financing cost of government bonds." Wang Qing said.

From the perspective of the funding situation, the speed of government bond issuance has increased in August, which has caused disturbance to liquidity. According to the issuance plan estimates, the total issuance of government bonds in the third and fourth quarters will exceed 3 trillion yuan each. In August, the net financing of government bonds reached around 1.7 trillion yuan, and it will take some time for this part of the funds to be converted into fiscal expenditure, so the short-term funding gap may continue.

In addition, there is a large amount of reverse repo due this week, and the current injection of reverse repo is at a high level, resulting in significant pressure for rolling over. "In the first three weeks of August, the central bank's injection of reverse repo has exceeded 2.78 trillion yuan, which is at a high level. The reverse repo due this week is 1.2 trillion yuan. If it relies solely on short-term reverse repo to make up for it, there will be considerable pressure for rolling over. As one of the main channels for monetary injection, MLF can better release medium- and long-term liquidity through appropriate continuous operation." Wen Bin told Caixin reporters.

The MLF interest rate is expected to be lowered in the future.

Since the MLF operation rate was lowered by a large margin of 20 basis points on July 25th, the MLF operation rate in August is 2.3%, which is the same as the operation rate on July 25th and is in line with market expectations. However, in light of the recent implementation of the expected rate cut by the Federal Reserve, experts believe that there is a possibility of further rate cuts in the future.

"Taking into account the clear signal of rate cut given by Fed Chairman Powell at the Jackson Hole Symposium on August 23rd, the monetary policy space in China has further opened up. With the internal demand for stabilizing growth, reducing costs, and the external pressure of stabilizing the exchange rate easing, it is possible to expect further rate cuts in the fourth quarter." Wen Bin pointed out that at that time, the MLF interest rate will follow the OMO interest rate and may have a larger rate cut, in order to further narrow the spread between MLF and market rates such as certificates of deposit.

Wang Qing also believes that considering the economic situation and price level, the central bank may once again lower key policy rates in the fourth quarter, namely the 7-day reverse repo rate, with an estimated rate cut of 10 to 20 basis points. In addition, since the MLF operation rate is generally higher than the interbank CD rate, there is still some downward space for the MLF operation rate in the future.

"This helps reduce bank funding costs and keeps the net interest margin of banks basically stable while pushing for lower corporate and household loan rates." Wang Qing said that in the short term, government bonds will continue to be in the peak period of issuance, and MLF may continue to be increased in the future. However, the central bank may still cut the reserve requirement ratio in the second half of the year.

Editor/Lambor