PBOC Conducts RMB 600 Billion MLF Operation as August Net Injection Widens Sharply to Bolster Bank Lending

On August 25, the People’s Bank of China conducted a one-year Medium-term Lending Facility (MLF) operation totaling RMB 600 billion. This marks the sixth consecutive month of increased MLF rollovers, and with RMB 300 billion in outright reverse repo injections through August 22, the net medium-term liquidity provision reached RMB 600 billion—double July’s amount and the largest monthly net injection since February 2025.

Following the RRR cut in May, which released RMB 1 trillion of long-term liquidity, the PBOC has maintained three months of net medium-term injections. Wang Qing, Chief Macro Analyst at Dongfang Jincheng, observes that this sustained support coincides with a peak in government bond issuance and reflects coordinated monetary and fiscal policies aimed at encouraging banks to expand credit.

After credit demand was front-loaded into June, July’s lending figures weakened, but Wang expects new credit issuance to return to positive territory in August. He notes that anti-involution sentiment and a stronger stock market have pushed medium- and long-term rates higher and tightened banking-system liquidity, prompting the central bank to use tools such as the MLF to stabilize market expectations and ensure ample funding.

As month-end approaches, liquidity strain is set to intensify. This week, RMB 2.077 trillion of reverse repos and RMB 300 billion of MLF will mature. Tianfeng Fixed Income highlights that, although the probability of a sharp, sustained funding squeeze is low, volatility may exceed prior years’ levels, especially given non-seasonal factors like equity-bond interactions and potential redemption pressures on pure-bond funds.

A bond trader remarks that despite robust equity performance, the bond market has held up better than pessimistic forecasts, and redemptions have not accelerated. The recent announcement of increased MLF rollovers, together with sizeable repo injections, has at least ensured that liquidity remains sufficient.

Meanwhile, the PBOC’s ongoing net injections of medium-term liquidity signal a persistent emphasis on quantitative policy measures. Wen Bin, Chief Economist at China Minsheng Bank, points out that July’s data show the real-economy recovery encountering headwinds: retail sales growth slowed, property investment remained under pressure, credit demand was weak, and external demand risks persisted, underscoring the need for continued policy support.

Wang Qing adds that July’s manufacturing PMI slipped further into contraction, ending a two-month rebound, and macro indicators confirm rising downward pressure. Considering external volatility, domestic price dynamics, and the real-estate outlook, he anticipates the PBOC may cut the RRR or policy rates around early Q4 and resume sovereign bond purchases.

“In the current environment of external fluctuations and evolving growth momentum, an RRR cut in the near term seems unlikely,” Wang notes. “Instead, the central bank is more likely to maintain ample market liquidity through continued MLF rollovers and outright reverse repo operations, ensuring steady medium-term funding inflows.”