(Yicai) March 25 -- The new pricing system for one-year loans to banks that China’s central bank has introduced means the medium-term lending facility’s policy rate function has now entirely gone, according to a banking industry veteran.

To maintain ample liquidity in the banking system and better meet the different funding needs of financial institutions, MLF operations will switch to multiple bid pricing from unified bid pricing from this month, the People’s Bank of China said late yesterday. That means qualified banks can pay different interest rates on the loans, rather than one fixed rate.

The move will help lower banks’ liability costs, ease net interest margin pressures, and enhance sustainable financial support for the real economy, according to a source close to the PBOC.

“The MLF no longer has a unified bid rate, which signifies that the policy attribute of the MLF rate has been completely phased out,” the industry veteran said. 

After the loan prime rate -- the benchmark lending rate -- was linked to MLF rates in 2019, every subsequent MLF adjustment has driven corresponding changes in the LPR, the expert said, adding that since December 2021, however, the LPR has started to be adjusted independently.

At the Lujiazui Forum last June, PBOC Governor Pan Gongsheng said the seven-day reverse repo rate -- the rate at which banks borrow money from the PBOC through short-term reverse repurchase agreements -- will be the key benchmark policy rate, while the policy role of other term-based instruments will be gradually phased out.

Recent PBOC activities reveal that the gradual withdrawal of the MLF’s policy function has been implemented in a step-by-step manner. Since last July, MLF operations have been rescheduled to come after LPR quotations, effectively “uncoupling” the LPR from the MLF rates.

MLF operations also transitioned to rate-based bidding in July. Monthly announcements show that bid rates among participants vary and that the widening range has boosted their pricing capabilities.

The PBOC will sell CNY450 billion (USD62 billion) of one-year MLF loans today. With CNY387 billion (USD53.4 billion) coming due this month, the operation represents a net injection of CNY63 billion (USD8.7 billion) into the market, the first net liquidity injection since last July.

That net injection signals a moderately accommodative monetary policy stance, according to experts. Since the PBOC introduced outright reverse repos last October, the outstanding balance has gradually increased, easing the pressure on MLF operations to add medium-to-long-term liquidity, they added.

Consequently, the MLF's outstanding balance has declined to about CNY4 trillion from a peak of CNY7.3 trillion (USD551 billion from USD1 trillion), they noted, adding that the new pricing method will lower overall MLF funding costs, alleviating pressure on net interest margins at banks.

Editor: Martin Kadiev