Pedestrians pass by the People's Bank of China headquarters in Beijing, China on January 7, 2019.
Giulia Marchi | Bloomberg | Getty Images
China's central bank issued 200 billion yuan ($ 28.60 billion) on its medium-term credit facility for the second time this month on Friday, with lending rates remaining unchanged.
The move to add long-term funds surprised the market as the central bank had already raised funds last week.
Several traders said that the money supply was likely to increase borrowing costs in response to the increased liquidity in the interbank market from late Thursday.
Never Wen, an economist at Hwabao Trust in Shanghai, said the MLF loan injection should compensate for the liquidity squeeze even after cuts to the Multiple Reserve Requirement Ratio (RRR) this year.
In the short term, high consumer inflation prevents policymakers from immediately lowering interest rates.
"But at least liquidity must be released to support economic growth, especially after the sluggish lending data in October," Nie added.
"Consumer price inflation is high, but the Producer Price Index is still in a negative range, keeping companies' real borrowing costs high."
Markets Watching for Signs of Liquidity Struggles Following a Takeover of a Bank in Inner Mongolia, the government's rescue of other small banks this year revived concern over the health of hundreds of small lenders in the country as China's economic growth set in nearly 30-year low slowed.
The People's Bank of China (PBOC) announced on its website Friday that the interest rate on one-year MLF loans remained at 3.25%, just as it did in the previous operation.
A trader at a Chinese bank said that the MLF injection suggests that the new Loan Prime Rate (LPR) rate will be cut by 5 basis points next Wednesday.
Last week, the central bank lowered its interest rate on MLF loans for the first time since February 201
The volume-weighted average price of the interbank-market seven-day repo, considered the best indicator of China's overall liquidity, rose to a high of 3.4% on Thursday. This was the highest level since September 30, a day before a week-long national holiday.
The 7-day repo rate dropped to 2.7481% on Friday morning at 03:30 GMT.
The PBOC said that the loans and funds released from the second phase of targeted RRR reduction have reduced the compensation factors, including the tax payment period, in order to "adequately" maintain the liquidity of the banking system.
Friday is the date of the entry into force of the second phase of a targeted reduction in the reserves of commercial banks, which was announced by the PBOC in September.
The central bank usually performs MLF operations on maturity, but there are no such loans or reverse repos due on Friday.