Central Bank MLF Operation Or Normalization, Investors Still Need To Guard Against Risks.

In June 6th, the Central Bank of China on Friday and today continued to consult some banks on MLF operations, which is expected to normalize in the future.

It is suggested that investors still need to guard against risks and maintain the yield of 10 - year treasury bonds. The judgement of the fluctuation of 2.8-3.4% interval in 2016 will remain unchanged.

1, the medium and short term tools are normal, and the sense of stability and liquidity is obvious.

If the report is true, the central bank will conduct MLF operation enquiries for two consecutive working days, or mainly consider the following two aspects.

First, the recent central bank operation is intended to alleviate liquidity constraints and stabilize interest rates in the middle of the year.

June is the traditional high point of annual liquidity tension, which is mainly affected by the end of the quarter assessment. This year, the superposition of MPA and the increase of external interference from the Fed raise interest rates, the liquidity is tense or aggravated, and the central bank's early adjustment is reasonable.

After the normalization of operation, the central bank showed the intention of normalizing MLF operation.

With the current credit default risk rising and the regulatory authorities pushing the financial system to leverage, the more normal monetary policy tools in the medium and short term will also help stabilize liquidity and prevent currency market interest rates from rioting.

2, put more precise drip irrigation, liquidity "fragmentation, cyclical" reinforcement

If the report is true, the MLF operation tends to be normalized, which means that the traditional easing of "flood irrigation" is difficult to reproduce. The structural tools of monetary policy are more distinct, and the characteristics of liquidity fragmentation and periodicity will be more prominent.

On the one hand, the medium and short term tools tend to be normalized, which is stable since 2015.

The extension of "precision drip irrigation" put forward by the review of the main characteristics of the policy can avoid the risk of the risk and the pformation of the economic structure better while avoiding the overall easing.

On the other hand, in the context of OMO+MLF+PSL's new flagship of monetary policy, the normalization of short and medium term operations has also strengthened the keynote of monetary policy regulation of loose structure, so that the overall liquidity is stable, the local small wave rollover is fragmented, the cyclical characteristics will be more significant, and the probability and necessity of full discharge of water will decrease. This further confirms our previous views.

3, normalizing the "quantity", and looking at the price as a whole.

Medium and short term currencies

The more continuity of tool placement highlights the care of the central bank's liquidity.

This means that the "MLF" rate is expected to increase significantly, so that the guidance of operating interest rate on market interest rates will be further enhanced, and the central bank can also pmit monetary policy signals to the market in a timely manner through the manipulation of interest rates, so that the overall orientation of monetary policy is more biased than the price control framework.

In particular, in the second half of the year, the "Asian inflation" superimposed the fluctuation of RMB exchange rate. The central bank's regulation of the fundamentals will be more fine tuned and preadjusted. Therefore, the change of "price" will be more important. We can refer to our comments on the review of the main features of prudent monetary policy since 2015 in May 26th.

On the bond market, the Fed's interest rate hike in June was basically hopeless, which meant that external constraints faced by monetary policy eased.

However, media reports yesterday that the central bank conducted MLF enquiries on two consecutive working days, showing the intention of normalization of medium and short-term tools. The style of "precision drip irrigation" will also be strengthened, and the fragmentation of liquidity and the characteristics of periodicity will be more significant.

At the same time, the interest rate target of the central bank is expected to remain stable. Therefore, although the Fed's interest rate hike is not expected to lead to a brief breather in the bond market, yesterday's rate of return did not descend sharply, consistent with our judgement that the yield of the 10 year treasury bond last week was near 3%.