The People's Bank of China announced on December 24 that it will conduct a 400 billion yuan Medium-term Lending Facility (MLF) operation on December 25.
With 300 billion yuan of MLF maturing this month, the net injection in December stands at 100 billion yuan, marking the tenth consecutive month of incremental rollovers, in line with market expectations. Considering the central bank also conducted a net injection of 200 billion yuan via outright repo operations, the total net medium-term liquidity injection for December reached 300 billion yuan, down by 300 billion yuan from the previous month.
**Sustained Net Injections to Maintain Ample Liquidity** Since the May reserve requirement ratio cut, the central bank has continued net medium-term liquidity injections for the seventh consecutive month. Analysts attribute this to three factors: 1. The earlier allocation of 500 billion yuan in local government debt quotas to address existing liabilities and expand effective investment, implying further government bond issuance in December. 2. The completion of the 500 billion yuan new policy-oriented financial tool in October, which will drive faster disbursement of medium- to long-term loans in December. 3. A notable increase in bank negotiable certificate of deposit (NCD) maturities this month.
These factors could tighten banking system liquidity, necessitating central bank support. By injecting medium-term liquidity via MLF and outright repos, the central bank ensures stable and ample funding conditions, supporting growth and market confidence toward year-end.
However, compared with November, the combined net injection of MLF and outright repos in December decreased by 300 billion yuan. Industry experts attribute this to a decline in net government bond financing.
Market conditions show short-term liquidity remains seasonally loose, with overnight rates briefly falling below 1.3%. Long-term liquidity tightened marginally amid rising demand for long-term interbank liabilities after banks removed long-term deposit products, though rates remain low from an annual perspective. The central bank's operations align with market expectations.
**Expanded Policy Toolkit** Experts note that the Central Economic Work Conference emphasized maintaining ample liquidity, with the central bank's accommodative stance unchanged.
Since 2025, net injections via MLF and outright repos have totaled 4.961 trillion yuan, sustaining stable liquidity conditions. This has supported large-scale government bond issuance and economic growth targets.
The central bank has diversified its liquidity management toolkit, including tools like bond trading and capital market support measures, enhancing flexibility in addressing fiscal and bond issuance fluctuations.
China’s liquidity tools align with international standards, covering intraday funding (e.g., automatic pledged financing), routine liquidity supply (e.g., repos, MLF, bond trading), emergency support (e.g., Sun Life), and targeted lending. Collateral management prioritizes high-liquidity, low-risk assets like government and policy bank bonds. Pricing mechanisms, such as Sun Life rates set slightly above policy rates, balance demand with avoiding over-reliance on central bank funding.
Looking ahead to 2026, the Central Economic Work Conference calls for continued moderately loose monetary policy, prioritizing stable growth and price recovery. Experts expect the central bank to deploy a mix of tools to maintain ample liquidity and supportive policies.
