China's Central Bank Revamps Loan Strategy Amid Evolving Monetary Policy Landscape

China's central bank is adjusting the method for selling medium-term loans, possibly diminishing the instrument's monetary policy influence. By introducing a fixed-quantity, interest-rate bidding approach, the move intends to better meet varied funding needs and support market liquidity, coinciding with the shift to the seven-day reverse repo rate.

China's central bank has announced significant changes to its medium-term loan selling strategy, which analysts suggest may reduce its impact on monetary policy. On Tuesday, the People's Bank of China will issue 450 billion yuan in one-year medium-term lending facility (MLF) loans, employing a new fixed-quantity, interest-rate, and multiple-price bidding methodology.

This strategic modification aims to shift the focus from the MLF rate as a policy tool, leveraging a price discovery process to assess market demand. The central bank asserts that this approach will ensure adequate banking system liquidity and address the distinct funding needs of various institutions effectively.

This move aligns with China's central bank's gradual transition towards using the seven-day reverse repo rate as its primary policy rate while maintaining market stability. Additionally, the bank indicated readiness to adjust banks' reserve requirement ratio and interest rates as deemed necessary in future monetary assessments.

(With inputs from agencies.)