There’s a little bit of panic going on in Chinese policy circles.

When the PBoC cut a key short-term rate for the first time in nearly a year earlier this week, traders assumed China’s central bank was marking a transition: Officials have telegraphed an intention to signal the market with the seven-day reverse repo rate going forward as opposed to the rate on one-year policy loans off which China’s de facto benchmark lending rates, the one- and five-year loan prime rate tenors, are priced. Both of those rates (the LPRs) were cut by 10bps on July 22 shortly after the PBoC lowered the seven-day repo rate by the same token amount.

Fast forward to Thursday and the PBoC cut the above-mentioned one-year policy rate. By 20bps. That’s not enough to matter for disaffected households and depressed consumers, but it’s a lot by PBoC standards.

As the figure above shows, the cut to the MLF rate was the largest since the COVID panic.

Without delving too far into the laborious details, the PBoC’s trying to streamline what still counts as a needlessly complex, multi-tiered rate regime. That project’s working in tandem with the bank’s easing efforts.

The one-year MLF rate’s disconnected from the market-based cost of funds by about 50bps on the upside, which is to say it’s useless except as a ceiling: If you can fund yourself at a lower rate, that’s what you’ll do. Demand for those one-year policy loans is thus receding, making the associated rate less relevant. The idea is to sunset that rate — which, to reiterate, is or was, the base off which commercial loans are priced — in favor of the rate on short-term repos. In theory anyway, that should bring everything into better alignment and enhance the PBoC’s capacity to micromanage the cost of money. (A proxy puts the market-based cost of funds at 1.90%, or thereabouts, right around the seven-day repo rate, versus 2.30% for one-year MLF loans.)

So, why cut the one-year MLF? Or, more to the point: Why cut it out of the blue, on Thursday, off-cycle? The PBoC generally rolls these loans (injecting or draining liquidity in the process) mid-month, ahead of the 20th, when the LPRs are set. This month, they kept the MLF rate unchanged on the 15th (when they drained funds on net), then turned around and injected funds on the 25th at a rate that represented the biggest cut in over four years. What’s with that?

I assume — I hope — that the PBoC conferred with banks to give them some kind of indication as to when the MLF operations will be conducted going forward. If not, they’re inviting problems.

Old MLF funding will still mature mid-month. If the PBoC doesn’t conduct any MLF on those maturity dates, all of those maturities will be a de facto liquidity drain — because the PBoC won’t be rolling any loans. That sets up a potential funding squeeze between the 15th and whenever the PBoC decides to conduct MLF. Maybe the point is to force banks to lean into the short-term repos, thereby facilitating the transition. I don’t know, but it seems like a recipe for uncertainty.

Ultimately, Thursday’s MLF cut was probably just a signal that the Party’s very concerned about growth, and is pulling the monetary levers — all of them — even as the evidence overwhelmingly suggests they’re pushing on a string.

For the umpteenth time: The problem in China isn’t the price of credit/money. The problem’s on the demand side. Only fiscal stimulus can address that.