PBOC Opens MLF Liquidity Tap Again as Yuan Defense Drains Funds

China’s central bank has opened its liquidity tap again, providing 110 billion yuan ($17 billion) to 14 lenders on Wednesday.

The six-month Medium-term Lending Facility from the People’s Bank of China to the commercial lenders was priced at 3.35 percent, the central bank said on its official Weibo account, without specifying the recipients. The rate was unchanged from an MLF operation in July.

The PBOC uses such injections to keep liquidity ample as the government tries to underpin a faltering stock market and drains funds from the banking system to support the yuan. The Shanghai Composite Index reversed a plunge of as much as 5.1 percent to close up 1.23 percent.

China allowed the yuan to fall the most in two decades last week but is expected to spend $40 billion of its foreign-exchange reserves a month to keep the currency from sliding further, a Bloomberg survey showed. As the PBOC defends the yuan, it must buy the currency in the market, draining liquidity. China’s overnight money-market rate rose to the highest level since April on Wednesday.

The PBOC pumped 120 billion yuan into the financial system Tuesday via the biggest offering of seven-day reverse-repurchase agreements since January 2014.

The central bank provided 250 billion yuan of MLF loans to banks in July, and total outstanding MLF credit was 380 billion yuan at the end of July, according to PBOC data.

— With assistance by Xin Zhou

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