The first week after the holiday faces a major test for liquidity; the central bank conducts 600 billion yuan MLF operations, continuing to increase the amount for 12 consecutive months

China Financial News, February 24 (Reporter Cao Yunyi) — The People’s Bank of China announced today that it will conduct a 600 billion yuan Medium-term Lending Facility (MLF) operation on February 25, with a one-year maturity. This move indicates that the February MLF will be increased by 300 billion yuan, marking the 12th consecutive month of additional injections, though the scale this month is smaller than January’s 700 billion yuan.

The first week after the holiday coincides with tax payment periods and the end of the month, coupled with a total of 2.7 trillion yuan in maturing open market operations during the week, along with new stock issuances by the Beijing Stock Exchange, which are expected to disrupt liquidity conditions. Several experts told China Financial News that, from the perspective of the central bank’s support for liquidity, the net liquidity injection in mid-February reached 900 billion yuan, remaining at a relatively high level. “The new local government debt quota for 2026 has been issued early, and this year’s fiscal policy continues to prioritize front-loading efforts.”

First Week After the Holiday Faces Liquidity Test; PBOC Continues MLF Injections

During the first week after the Spring Festival, a large amount of reverse repos matured, putting pressure on liquidity. According to data from the open market, over 2.2 trillion yuan in reverse repos will mature this week, plus 300 billion yuan of MLF due, creating significant liquidity withdrawal pressure.

Today, the PBOC announced that to maintain ample liquidity in the banking system, on February 25, 2026, it will conduct a 600 billion yuan MLF operation via fixed-rate, bid-based, multi-price bidding, with a one-year maturity. Considering that 300 billion yuan of MLF will mature in February, this also means that the MLF will be increased by 300 billion yuan this month, marking the 12th consecutive month of additional injections, though the scale is smaller than last month’s 700 billion yuan.

However, before the holiday, the PBOC conducted net injections of 600 billion yuan through buy-and-repurchase agreements (repos) for two maturities in February, resulting in a total net injection of 900 billion yuan for the month, marking ten consecutive months of net liquidity addition.

In the first week after the holiday, the pressure from maturing open market operations reached a historic high. Besides the 300 billion yuan of MLF maturing, 7-day and 14-day reverse repos of 85.24 billion yuan and 140 billion yuan respectively will mature, with the maturing schedule accelerated. Today, 85.24 billion yuan of 7-day reverse repos and 60 billion yuan of 14-day reverse repos will mature, and the PBOC will conduct 52.6 billion yuan of 7-day reverse repos, resulting in a net withdrawal of 92.64 billion yuan.

Regarding market interest rates, the overnight SHIBOR opened at 1.3620%, up 4.64 basis points. The 7-day SHIBOR was 1.5530%, up 22.97 basis points. The 3-month SHIBOR was 1.5780%, down 0.20 basis points.

“Tax periods overlapping with the end of the month, combined with a total of 2.7 trillion yuan in maturing open market operations during the week, plus new stock issuance by the Beijing Stock Exchange, are expected to cause some disturbance in liquidity,” said the China Construction Bank Financial Markets Department. However, the return of cash after the holiday, along with a significant decline in weekly government bond net payments from over 700 billion yuan to 150 billion yuan, will help ease liquidity pressures.

To address liquidity pressures, the PBOC’s continued MLF injections meet market expectations. Dong Ximiao, Chief Researcher at Zhaolian, told China Financial News: “Through buy-and-repurchase agreements and MLF operations, the PBOC has been injecting medium- and short-term liquidity into the market for several months, effectively maintaining ample liquidity and ensuring the stable operation of financial markets at year-end and beginning of the year, while further improving the maturity structure of market liquidity.”

Wang Qing, Chief Macro Analyst at Orient Securities, told China Financial News that the significant increase in medium-term liquidity injections, including MLF, in the first two months of the year is also driven by the continued front-loading of fiscal efforts this year. “The 2026 local government debt quota has been issued early, and this year’s fiscal policy continues to prioritize front-loading. This means that despite the Spring Festival holiday in February, there will still be substantial government bond issuance. Additionally, structural monetary policy tools such as rate cuts, increased volume, and expansion in 2026 will lead to large-scale credit deployment in the first quarter. All these factors will somewhat tighten liquidity conditions.”

Dong Ximiao also noted that February remains a month with concentrated bank lending, and combined with increased cash withdrawals before the holiday, market demand for liquidity has increased.

PBOC Maintains Moderate Easing Monetary Policy; Rate Cuts and Reductions Less Likely in the Short Term

The market generally believes that whether liquidity conditions will ease after the holiday depends on the PBOC’s hedging efforts. Huaxi Securities pointed out that if the PBOC maintains its support, interest rates are expected to decline as scheduled. However, due to large-scale reverse repos maturing, tax periods, and cross-month pressures, the downward space for interest rates may be limited. “It is expected that R001 will stay in the 1.35-1.45% range, and R007 will decline to around 1.50-1.60%.”

Besides tax periods, other factors affecting liquidity after the holiday include government bond issuance. In the first week after the holiday, government bond issuance is planned at 641.4 billion yuan, up from 522.1 billion yuan the previous week. Additionally, a 3-month discount treasury bond will be issued on the 25th, with an actual issuance scale possibly reaching 681.4 billion yuan. However, the scale of certificate of deposit maturities has decreased. This week, CD maturities totaled 631.7 billion yuan, down from 978.2 billion yuan the previous week, roughly matching the median weekly maturity of 632.1 billion yuan since 2025.

Looking ahead, the market generally expects monetary policy to continue supporting the real economy. The PBOC has already set the tone at the 2026 work conference to continue implementing a moderately easing monetary policy, flexibly and efficiently using tools like RRR cuts and rate reductions to maintain ample liquidity. However, the likelihood of rate cuts or RRR reductions in the near term remains low.

Dong Ximiao pointed out two changes in 2026 monetary policy: first, a slight adjustment in policy objectives, shifting from “stabilizing and lowering” to “low-level operation” of overall social financing costs; second, a shift in policy approach, focusing more on improving the efficiency of existing policies rather than simple increases. After increasing liquidity through various monetary tools, the current approach is to observe the effects first and avoid using total volume tools like comprehensive RRR cuts for now, aligning with current policy thinking.

“This does not mean the window for comprehensive RRR cuts is closed; RRR cuts remain an important option in the central bank’s toolbox. They are a strong policy signal, releasing long-term liquidity and reducing financial institutions’ funding costs, thereby boosting confidence and stabilizing expectations. Currently, China’s weighted average reserve requirement ratio is 6.3%, leaving room for further RRR reductions,” Dong Ximiao said. “In the near future, RRR cuts are still possible and necessary, potentially larger than the 0.5 percentage point cut in 2025.”

“The significant increase in medium-term liquidity injections in the first two months indicates that the likelihood of RRR cuts in the short term is low. After the structural policy package introduced in January, monetary policy remains in an observation phase for now.”