What signals are conveyed by the central bank's "extremely low" reverse repurchase operations?

Since April, the People’s Bank of China has continuously carried out “ultra-low-volume” seven-day reverse repo operations. Among them, the operation sizes on April 1 and April 2 were both 500 million yuan, which is the lowest amount of operations since the PBoC established a daily regular open-market operation mechanism in February 2016, and this has drawn widespread attention from the market.

In my view, the PBoC’s consecutive “ultra-low-volume” reverse repo operations are routine adjustments in a context of ample liquidity. They also directly reflect China’s monetary policy control framework shifting from a quantity-based approach to a price-based approach, making the policy response more flexible and precise. This is of great significance for maintaining stable operation of financial markets.

Behind the “ultra-low-volume” reverse repo operations is abundant liquidity in the banking system. March, as the quarter-end month, sees stronger fiscal spending. At the same time, the PBoC has maintained a relatively strong level of care for liquidity. From the beginning of the year to the end of March, the PBoC has cumulatively net injected more than 1.65 trillion yuan of medium- and long-term funds through the MLF (medium-term lending facility) and outright reverse repos, creating favorable monetary and financial conditions for the market.

As a “barometer” of liquidity, market interest rates more directly confirm the trend of easing in funding conditions. In March, the DR001 (the overnight pledged repo weighted average rate in the interbank market) average was around 1.31%, staying at a low level. After entering April, DR001 has even remained continuously below 1.3%, clearly indicating that short-term funding demand from financial institutions has declined and that the market is not “short of money.” Therefore, the PBoC’s decision to reduce short-term funding injections is a precise response to the market’s supply-demand relationship, rather than an active tightening of liquidity.

Accordingly, the market should not simply judge whether monetary policy has turned by looking at changes in the volume of open-market operations, especially changes in the quantity of any single open-market operation. Open-market operations are one of the PBoC’s ways to inject liquidity. Their scale is not only affected by policy stance, but also disrupted by seasonal factors such as residents’ tax payments and cash withdrawals during holidays. Therefore, judging the orientation of monetary policy solely by operation volume can easily be one-sided.

In recent years, China has been continuously shifting toward a price-based monetary policy control framework. The PBoC is gradually downplaying quantity-based targets and placing greater emphasis on the role of price-based regulation. The volume of open-market operations more often serves the goal of interest rate regulation. As Zulan Zou, Vice Governor of the People’s Bank of China, said at a press conference held by the State Council Information Office in January of this year: “Freely mix and match the various tools of open-market operations, maintain ample liquidity, and guide overnight rates to run around the level of policy interest rates.” The recent “ultra-low-volume” operations in the open market precisely demonstrate the PBoC’s more flexible and more precise approach in operations. They not only avoid liquidity stagnation, but also ensure stable operation of the money market—this is also the proper meaning of the shift toward price-based regulation in monetary policy.

In terms of the policy tone, the current moderately accommodative monetary policy has not changed. Looking ahead, the PBoC will continue to reasonably arrange tool categories based on liquidity and market operating conditions, do a good job in liquidity management, and support the stable and healthy development of financial markets.

（Source: Securities Daily）