UPDATE 1-PBOC leads a small net liquidity drain in the medium term, suggesting a tightening bias

(Add details, comments, and background)

SHANGHAI, Jan.15 (Reuters) – China’s central bank on Friday did a slight net drain of medium-term loans into the banking system and kept the facility’s rates unchanged, a move according to investors suggesting a shift to a bias monetary policy tightening.

The People’s Bank of China (PBOC) said in a statement that it had injected 500 billion yuan ($ 77.28 billion) in one-year loans on the Medium Term Loan Facility (MLF) to financial institutions. and kept the loan rate at 2.95%. previous operations.

This would mainly cover a 300 billion yuan batch of MLF that will expire on Friday and another batch of TMLF worth 240.5 billion yuan maturing on January 25, but would leave a net drain of 40.5 billion yuan. yuan.

The central bank said the MLF injection was intended to “maintain reasonably sufficient liquidity in the banking system,” and Friday’s deal was a rollover covering MLF and TMLF loans maturing in January.

However, several traders said the small net leakage indicates that the central bank has started to fine-tune its monetary policy.

“500 billion yuan of injection of funds against 540.5 billion yuan of maturity … The action of the PBOC emphasized the commitment of normalization,” said a trader of a foreign bank .

Expectations that the PCB might prefer more modest liquidity corrections to deeper easing have grown stronger since recent high-level policy meetings indicating a reduction in central bank support to the economy this year.

The authorities have indicated that they want to avoid sudden policy changes and keep economic growth within a “reasonable range”.

Investors in Chinese money markets are lowering their bets for a reduction in bank reserve requirements ahead of the Lunar New Year holiday next month, reflecting belief that authorities will avoid strong easing signals amid an economic recovery.

Moreover, the regular rate of the MLF should not indicate any change for the country’s preferential reference rate (LPR) when it is set monthly next Wednesday.

The MLF, one of the main tools of the BPC in managing long-term liquidity in the banking system, serves as a guide for the LPR.

In the same statement online, the PBOC also said it injected an additional 2 billion yuan through seven-day reverse repurchase agreements with the rate unchanged.