Market interest rates hit a new low this year; loose liquidity drives flexible open-market operations, with volume reduced under buyout-style reverse repurchase transactions.

On April 3rd, the central bank announced that it would conduct 800 billion yuan of 3-month reverse repurchase operations. Since the maturity amount for that month reached 1.1 trillion yuan, this operation resulted in a net withdrawal of 300 billion yuan.

This reduction in volume aligns with market expectations, driven by the current sustained ample liquidity in the banking system and a clear decline in financial institutions’ demand for central bank funds.

Recently, liquidity has remained loose, with market interest rates staying near a low level of approximately 1.2%. After the Spring Festival, residents’ cash flows back into banks, coupled with concentrated fiscal expenditures at the end of the quarter, leading to generally ample funds among financial institutions since April, and market interest rates continue to decline. Data shows that on April 3rd, the overnight rate DR001 dropped to around 1.23%, hitting the lowest level of the year; the issuance rate for 1-year interbank certificates of deposit from state-owned banks and joint-stock banks fell below 1.50%, setting a new historical low.

Market authorities stated that, in this context, the demand for liquidity from financial institutions has decreased, and the continuation of reduced operations was expected.

The 3-month reverse repurchase mainly addresses seasonal factors. Historically, in the first quarter of previous years, cash injections and withdrawals around the Spring Festival have had significant impacts. The 3-month reverse repurchase sees high demand in January and February before the festival, with demand decreasing after April, which is also a regular pattern.

For example, in January 2025, 1.2 trillion yuan of 3-month reverse repurchase operations were conducted, and when they matured in April, 700 billion yuan were rolled over, reducing volume by 500 billion yuan. This year’s operation pace is basically consistent with last year, with a flexible and precise approach of both tightening and easing.

Although this time’s reverse repurchase operations resulted in net withdrawal, overall, in the first quarter, an additional 300 billion yuan was injected since the beginning of the year, bringing the total balance to 6.8 trillion yuan.

Currently, the central bank’s open market operations mainly include daily 7-day reverse repos and 3-month, 6-month, and 1-year maturities on the 5th, 15th, and 25th of each month. The 7-day reverse repo sufficiently meets short-term funding needs of primary dealers, and recent operations have been at very low levels.

The expert emphasized that the market should pay more attention to price signals rather than the operation volume itself. The central bank’s monetary policy operations directly influence the amount of base money, or liquidity in the banking system, which refers to the reserves banks hold at the central bank. This is different from the “liquidity” concept related to the amount of cash residents hold daily or the ease of asset liquidation. The supply and demand factors of banking system liquidity are complex, involving fiscal revenue and expenditure, circulating cash, financial institution behavior, and various seasonal factors. The central bank’s daily operation volume does not indicate a change in monetary policy stance and is not directly related to monetary policy tightening or easing.

The expert further explained that these factors ultimately influence market interest rates through their effect on liquidity supply and demand, with the overnight rate being the most active and sensitive indicator.

In January this year, Vice Governor Zou Lan of the central bank explicitly stated at a press conference that the goal of open market operations is to guide the overnight rate to operate around the policy rate, providing a more scientific way for the market to observe liquidity conditions.

(This article is from First Financial)