Fifth Consecutive Month of Expanded Issuance: PBOC Announces RMB 400 Billion MLF Operation, with Potential for Continued Upsizing

The People's Bank of China (PBOC) has announced that on Friday, July 25, it will conduct a Medium-term Lending Facility (MLF) operation of RMB 400 billion through a fixed-quantity, interest-rate bidding, and multiple pricing mechanism, with a one-year maturity. As RMB 300 billion in MLF matures this month, the net injection for July will amount to RMB 100 billion, marking the fifth consecutive month of expanded MLF operations.

Industry sources told CLS that following the RMB 1 trillion in long-term liquidity released by the reserve requirement ratio (RRR) cut in May, medium-term liquidity has remained in a net injection state. “In the second half of the year, the MLF is expected to continue this expanded issuance trend, supplemented by outright reverse repo operations to steadily inject medium-term liquidity into the market.”

The PBOC’s tender announcement for July 2025 confirms that in order to maintain ample liquidity within the banking system, it will conduct a RMB 400 billion one-year MLF operation on July 25 using a fixed-quantity, interest-rate bidding, and multiple pricing mechanism.

Given that RMB 300 billion in MLF matures in July, this operation will result in a net injection of RMB 100 billion. Since March, the PBOC has consecutively implemented expanded MLF issuance for five straight months.

Economist Yu Fenghui commented to CLS that this RMB 400 billion MLF operation reflects the PBOC’s intention to maintain reasonable and sufficient liquidity in the banking system. Under the current economic conditions, the move is conducive to stabilizing market expectations and strengthening the ability of financial institutions to support the real economy, particularly small and micro-enterprises. The RMB 100 billion net injection underscores the central bank’s capability to manage liquidity with precision, balancing the growing market demand for capital with the need to guard against financial risks.

As of July 24, the PBOC had also conducted RMB 200 billion in net injections through outright reverse repos. This means that the total net injection of medium-term liquidity for July reached RMB 300 billion, nearly the same as June’s RMB 318 billion.

Following the RRR cut in May, which released RMB 1 trillion in long-term liquidity, medium-term liquidity has continued to be in a net injection state in recent months. Wang Qing, Chief Macro Analyst at Dongfang Jincheng, pointed out two underlying reasons: the ongoing peak period of government bond issuance and regulatory guidance for financial institutions to step up their credit supply. In addition, the PBOC’s continued net injections of medium-term liquidity signal that it is intensifying its use of quantitative monetary policy tools.

“This suggests that although macroeconomic performance in the first half remained stable with modest strength, monetary policy continues to adopt a supportive stance. This supports policy continuity and helps anchor market expectations,” Wang Qing added.

Yu Fenghui also noted that the operation reflects both the flexibility and foresight of monetary policy, playing a positive role in fostering stable and healthy economic development. It also indicates that the PBOC will maintain a prudent monetary policy stance while adjusting in response to market dynamics to support high-quality economic growth.

Wang Qing stated that continued medium-term liquidity injections can effectively ensure adequate market liquidity, illustrating coordinated efforts between monetary and fiscal policy. This facilitates the expansion of credit and better addresses financing needs for businesses and individuals, serving as a key counter-cyclical policy tool.

Looking ahead, Wang Qing noted that while the likelihood of near-term RRR or interest rate cuts remains limited, monetary policy in the second half of the year is expected to further support domestic demand and economic growth, with enhanced alignment with fiscal policy. As one of the key quantitative policy tools, the MLF is likely to maintain its expanded issuance trend, supplemented by outright reverse repo operations to steadily inject medium-term liquidity.

Wen Bin, Chief Economist at China Minsheng Bank, told CLS that there is still some likelihood of interest rate cuts at the end of the third quarter or in the fourth quarter, with the LPR expected to be adjusted downward accordingly. “In the second half of the year, as the impact of tariff-related uncertainties fades and the front-loading of exports and re-exports eases, China’s export growth may slow, requiring robust domestic demand to counterbalance. Meanwhile, nominal interest rates have reached historic lows, but the PPI remains subdued, resulting in elevated real financing costs and weakening effective credit demand. With market expectations for a U.S. Federal Reserve rate cut in September and a continued weakening of the U.S. dollar, China has room for further RRR and rate cuts.”

“Considering the need for multiple policy balances, overall monetary policy is expected to remain moderately accommodative. The probability of another RRR and interest rate cut at the end of Q3 or in Q4 is relatively high, with the LPR expected to be adjusted downward accordingly to support the expansion of credit,” Wen Bin said.

Wang Qing added that in the second half of the year, the PBOC may also resume its purchases of government bonds at an appropriate time, using open market operations to inject long-term liquidity into the banking system. “This would ensure that liquidity remains at a stable and ample level, support government bond issuance, enhance banks’ lending capacity, and increase financial support for the real economy, effectively mitigating the impact of external uncertainties on macroeconomic performance.”