5 billion yuan reverse repurchase hits a 10-year low; liquidity expected to remain relatively loose in April

Although the People’s Bank of China’s open market operations have become more restrained since March, liquidity conditions in the interbank market have not shown any obvious tightening. Near cross-month and cross-quarter turning points, money market rates overall have remained at a low level, and liquidity has continued to run in a stable pattern.

On the first trading day of April, the central bank’s so-called “ultra-low” operations drew market attention: in an April 1 announcement, the PBOC said it would conduct a reverse repo operation worth 500 million yuan for a 7-day term, with the winning rate at 1.4%. With 78.5 billion yuan in reverse repo maturing that day, the central bank achieved a net liquidity drain of 78 billion yuan.

The scale of this reverse repo operation was the lowest level since 2015. Analysts believe that, against a backdrop of relatively loose funding conditions, this signals that the PBOC intends to steadily tighten while guiding rates to move within a reasonable range. Overall, liquidity conditions are still expected to remain sufficient, but there is limited room for rates to keep falling sharply.

March’s liquidity remained steady amid reduced funding injections

Looking back at March, the pace of the PBOC’s operations clearly became more balanced, but market liquidity did not come under pressure as a result.

In terms of operations: the buyout-style reverse repo was resumed with reduced issuance for the first time in 9 months, with a net liquidity drain of about 300 billion yuan; reverse repo operations were mainly carried out using routine measures, with only a modest increase at the cross-quarter point; and the Medium-Term Lending Facility (MLF) saw a small net injection of 50 billion yuan. Overall, open market operations in March showed a marginal trend toward convergence/tightening.

However, funding prices remained stable. The overnight repo rate (R001) generally stayed around 1.39% with narrow fluctuations. During the tax period phase, there was no obvious upward move either. The 7-day repo rate (R007) basically stayed near 1.50%, rising briefly to 1.52% at the beginning of the cross-quarter period, and then quickly falling again. The magnitude of volatility was clearly lower than in the same period in previous years.

Zenghui Zhao, Chief Fixed-Income Analyst at Changjiang Securities, told a reporter from Shanghai Securities News that from March 23 to 27, the PBOC achieved a net injection of 231.9 billion yuan through 7-day reverse repo operations, and maintained appropriate hedging during the tax period phase. The fluctuations in major money market rates such as DR001, R001, DR007, R007, and others were all fairly limited, indicating that overall supply and demand of funds in the market remained relatively balanced.

Market institutions generally believe that in March, even with the PBOC reducing the scale of injections, liquidity still showed resilience, which is closely related to the “stock support” created by earlier large injections.

Qing Wang, Chief Macro Analyst at Orient Securities/Great Credit, told a reporter that in January and February, the PBOC cumulatively injected about 1.9 trillion yuan in medium- and long-term liquidity through the MLF and buyout-style reverse repos. In addition, the government bond net financing scale in March was relatively low, so liquidity in the banking system overall remained sufficient. At the same time, around month-end and quarter-end, by increasing the issuance of short-term reverse repos, the central bank effectively smoothed out funding-market volatility.

“Ultra-low” operations send a loosening-for-April signal on liquidity

Entering April, the PBOC reinforced market expectations that liquidity will remain steady and slightly loose by using an “ultra-low” reverse repo operation.

Wang Qing said that the 500 million yuan reverse repo operation on April 1 was the smallest scale since 2015. The direct reason is that funding conditions are already in a steady-but-loose state, which also reflects the policy intention to guide market rates to avoid falling too much.

From seasonal patterns, April’s funding rates typically fall compared with March. Institutional calculations show that over the past five years, the centers of gravity for April’s R001 and R007 moved down by about 15 basis points and 20 basis points, respectively, relative to the March averages. However, because this year’s March funding rates are already at a relatively low level, markets generally expect the rate decline in April to be less than the historical average.

From the perspective of supporting factors: fiscal spending near the end of the quarter creates a flow-back of funds at the beginning of the month, which provides additional liquidity; April is usually a slow season for government bond issuance, so the crowding-out effect on liquidity is relatively limited. A person from Huaxi Securities expects that the net financing scale of government bonds in April may be between 930 billion yuan and 1.03 trillion yuan, and the marginal impact on liquidity overall is controllable.

Tan Yiming, Chief Fixed-Income Analyst at Tiansfeng Securities, said that April’s funding-rate center of gravity usually stays at a relatively low level throughout the year. Loan disbursement at the beginning of the quarter puts relatively limited pressure on liquidity. Combined with the central bank’s intention to support the market, the overall liquidity environment is expected to remain stable.

That said, institutions generally believe that April is a traditional major tax period, and tax-period fund outflows tend to cause more friction in liquidity than in March. Meanwhile, the maturity schedule for medium- and long-term funds in April is also larger than in March. Huaxi Securities’ calculations show that the total maturing amount in April—including 3-month and 6-month buyout-style reverse repos, MLF, and other medium- and long-term tools—adds up to about 2.3 trillion yuan, higher than March’s 2.05 trillion yuan. Given that the balance of medium- and long-term funds remains at a historically high level, it is possible that the PBOC will continue to reduce the scale of follow-up operations to drain some excess liquidity.

Zenghui Zhao also said that after the cross-quarter period ends, liquidity conditions at the start of April are very likely to ease at the margin, but in the second half of the month, attention should be focused on tax-period pressures, the implementation timetable for new policy-based financial instruments, and factors such as how banks’ interbank deposit absorption is progressing. If these factors coincide, funding rates may still rise somewhat in the middle and late parts of the month and toward the end.