China’s central bank, the People’s Bank of China (PBOC), has introduced a new lending mechanism to support liquidity in its banking system amid the upcoming expiration of substantial medium-term loans.
The move aims to ensure stable credit flows and bolster financial activity as the country seeks to meet its 5% annual growth target.
The PBOC’s newly launched “open market outright reverse repo operations facility,” activated Monday, will facilitate longer-term liquidity injections to the banking sector. This tool is designed to address the expiration of 2.9 trillion yuan (approximately $406.6 billion) in medium-term loans by year-end, helping banks avoid a funding shortfall and continue financing investments. The new facility allows the PBOC to conduct monthly transactions with primary dealers, offering a maturity of up to one year—significantly longer than the typical seven, 14, or 28-day reverse repo tenors, which are standard in daily operations.
Analysts suggest this mechanism brings China’s monetary policy framework closer to those of the US and European Union, modernizing the central bank’s approach. Xu Tianchen, senior economist at the Economist Intelligence Unit, noted the update aligns with global practices, enhancing the flexibility of China’s financial policies.
While the central bank statement did not specify details on the range of assets eligible under the new facility, reports indicate it will cover a range of debt types, including sovereign and local government bonds, financial bonds, and corporate debt. According to Shanghai Securities News, the tool will primarily target three- and six-month terms, helping adjust liquidity over the next year and offsetting the impact of expiring medium-term loans.
The PBOC has consistently pursued monetary easing policies in recent months, including interest rate cuts and liquidity injections, as it works to stimulate a Chinese economy grappling with sluggish property markets and cautious consumer spending. By introducing a longer-term liquidity tool, the PBOC is better positioned to support banks as the government readies for increased bond issuance, potentially fostering a more robust credit environment.
