UPGRADE 1-PBOC performs a small net drainage of medium fluidity, suggesting compression

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SHANGHAI, January 15 (Reuters) – China’s central bank made a small clean drain in medium-term loans in the banking system on Friday and kept rates on the facility unchanged, a move which investors say suggests a move to strict bias in monetary policy.

The People’s Bank of China (PBOC) said in a statement that it had issued 500 billion Yuan ($ 77.28 billion) worth of one-year medium-term loan (MLF) facility loans to financial institutions and maintained the rate on the -stable loans at 2.95% from previous operations.

That would pretty much cover a 300 billion Yuan batch of MLF coming to an end on Friday and another batch of TM.F worth 240.5 billion Yuan expiring on January 25, but leaving a net drainage of 40.5 billion Yuan .

The central bank said the MLF injection was intended to “maintain sufficient liquidity of the banking system”, and Friday’s activity was a spread over covering MLF and TMLF matured loans due in January .

However, several traders said the small net drain indicates that the central bank has begun to sharpen its monetary policy stance.

“500 billion Yuan of asset injection against 540.5 billion Yuan of maturity … PBOC action stressed normalization commitment,” said a trader at a foreign bank.

Expectations that the PBOC may prefer smaller liquidity solutions over a stronger discount from the recent major policy meetings reflect central bank support back to the economy this year.

Authorities have stated that they want to avoid sudden policy shifts and keep economic growth within a “reasonable range”.

Investors in Chinese money markets are scaling back a bet to cut to banks’ reserve requirements before next month’s New Year’s holiday, expressing belief that authorities will avoid strong easing signals in the midst of an economic recovery .

Separately, the stable MLF rate should not reflect any change for the country’s standard benchmark lending rate (LPR) at the monthly settlement next Wednesday.

The MLF, one of PBOC’s key tools in managing long-term liquidity in the banking system, serves as a guide for the LPR.

In the same online statement, the PBOC also stated that it had invested another 2 billion Yuan through seven-day reverse repos, with the rate unchanged.