Increasing the amount for the 13th consecutive month! The central bank conducted a 500 billion yuan MLF operation, corresponding to a net injection of 50 billion yuan.

Every reporter｜Zhang Shoulin Every editor｜Wei Wenyi

To maintain ample liquidity in the banking system, on March 25, the People’s Bank of China (hereinafter referred to as the “central bank”) conducted a 500 billion yuan MLF (Medium-term Lending Facility) operation through fixed quantity, interest rate bidding, and multiple price bidding methods, with a term of one year.

Image source: Central Bank official website

A reporter from the Daily Economic News noted that 450 billion yuan of MLF is maturing in March, which means that the MLF rollover in March will increase by 500 billion yuan, marking the 13th consecutive month of increase. After the MLF operation in March, the MLF balance further rose to 7.3 trillion yuan. However, taking into account the net return of 300 billion yuan from reverse repos in March, the total MLF and reverse repos remain in a net withdrawal state.

Wang Qing, chief macro analyst at Dongfang Jincheng, pointed out that this may mainly be related to the net liquidity injection of 1.9 trillion yuan in the first two months of this year and the continued abundance of liquidity in March, which does not indicate that the central bank will continue to tighten medium- to long-term liquidity.

Market liquidity structure has been loose since this year’s Spring Festival

After the MLF operation, the total net withdrawal of MLF and reverse repos in March will amount to 250 billion yuan.

In terms of liquidity, the team led by Mingming, chief economist at CITIC Securities, analyzed that the overall market liquidity has been loose since this year’s Spring Festival, with supply and demand for liquidity generally balanced, and medium- to long-term liquidity in a net withdrawal position since March.

Wang Qing believes that in the future, the central bank will comprehensively use various medium- to long-term liquidity management tools such as the reserve requirement ratio, government bond transactions, MLF, and reverse repos to keep the liquidity at a relatively stable and ample level.

“To ensure the funding needs of major projects in key areas and expand effective investment, the new local government debt limit for 2026 has been announced in advance, along with the government work report confirming that this year’s government bond financing scale will hit a new high, all indicating that the issuance scale of government bonds will remain at a high level in March and for some time thereafter,” Wang Qing stated. As the 500 billion yuan of new policy-based financial instruments is fully allocated by October 2025, the announcement in March to issue 800 billion yuan of new policy-based financial instruments primarily for expanding investment will continue to drive a large-scale issuance of bank matching loans in March and beyond, and the issuance of government bonds will also significantly increase.

Wang Qing pointed out that all of the above will bring a tightening effect on liquidity to a certain extent. Therefore, in response to the potential tightening of liquidity, the central bank needs to continuously inject medium- to long-term liquidity into the market through various policy tools, guiding liquidity to remain at a relatively stable and ample state. This also reflects a specific manifestation of the coordination between fiscal and monetary policies.

Cuts in reserve requirement ratio and interest rates may be moderately delayed

Looking ahead, the Mingming team stated that recent geopolitical conflicts have raised the risks of imported inflation in China, and monetary policy may reasonably arrange total operations in light of internal and external equilibrium, resulting in smoother operations. Attention should be paid to the marginal changes in subsequent fundamental data and fluctuations in global capital markets, with expectations that monetary policy will maintain a moderately loose tone.

So, does the net withdrawal of medium-term liquidity mean that cuts in the reserve requirement ratio are imminent? Wang Qing analyzed that generally, there is a certain substitution relationship between medium-term liquidity injection tools and long-term liquidity injection tools such as reserve requirement ratio cuts and government bond transactions. At the same time, it is necessary to consider the trends in the macroeconomic and financial landscape to determine the timing of reserve requirement ratio cuts. Since the end of February, the evolution of the Middle East situation has driven international oil prices sharply upward, and the overall domestic price level showed a strong upward trend in March, which may also disturb the momentum of economic growth. “In the short term, amid a sudden increase in external uncertainties, domestic monetary policy is likely to focus on maintaining ample liquidity and stabilizing market expectations; the current policy focus may temporarily shift towards controlling the rapid rise in prices, and cuts in the reserve requirement ratio and interest rates may be moderately delayed.”

Recently, Cheng Shi, chief economist at ICBC International, analyzed that as a macro-control tool centered on price signals, total policies can simultaneously act on bank fund supply and micro-subject financing demand, making them more suitable for stabilizing inflation expectations and restoring total demand. From an operational perspective, the structural adjustments at the beginning of the year to some extent indicate that policy easing in 2026 is more likely to be reflected in a mild and phased manner.

In terms of tool application, Cheng Shi predicts that quantity-based tools may take precedence, maintaining reasonably ample liquidity through reserve requirement ratio cuts to create an environment for structural policies to take effect. Currently, the average reserve requirement ratio of financial institutions is about 6.3%, and there is still room for a reduction of about 50 basis points. The use of price-based tools is relatively cautious; although there is objective space for interest rate cuts, a more gradual and slight approach is likely, dynamically assessed according to policy transmission effects. The current 7-day reverse repo rate is at a historical low of 1.4%, but there is still moderate adjustment space of 10-20 basis points. At the central bank level, the market expectation of a moderate appreciation of the renminbi provides some space for liquidity injection. At the bank level, since 2025, the net interest margin has shown signs of stabilization, maintaining at 1.42% for two consecutive quarters, and a significant amount of three-year and five-year deposits will mature and be repriced in 2026, releasing some space for interest rate adjustments. On the micro level, the new round of “two new” policies (massive equipment upgrades and consumer goods exchanges) in 2026 continues to support the expansion of domestic demand, with equipment updates for offline consumption infrastructure such as commercial complexes and shopping centers included in the support scope, further enhancing the “subsidy rate” of key consumer goods, which helps to boost confidence among enterprises and residents, thereby improving the transmission efficiency of monetary policy.

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