Central Bank Announcement: First 300 billion yuan landed!

Today, the central bank's previously hinted "addition of overnight reverse repo operation variety" has officially been implemented.

On June 29, the central bank stated in Open Market Operations Trading Announcement [2026] No. 123 that it conducted 157.5 billion yuan of 7-day reverse repo operations through a fixed-rate, quantity-based bidding method, and also announced the conduct of 300 billion yuan of overnight reverse repo operations.

Previously, the central bank had already "pre-announced" this operation. On June 25, the central bank issued an announcement stating that in order to better match the short-term liquidity needs of the banking system, the People's Bank of China would add the overnight reverse repo operation variety in the open market operations on June 29 and June 30, with the overnight reverse repo operation adopting a fixed-rate, quantity-based bidding method.

"This overnight reverse repo operation is both to better meet the cross-quarter liquidity pressure at the end of the half-year and an important measure to promote the transformation of the monetary policy framework." Dong Ximiao, chief economist of China Lianhe, told the Financial Times that the banking system faces funding gaps due to seasonal assessments at the end of June, and relying solely on 7-day reverse repos makes it difficult to precisely "shave peaks and fill valleys," while adding an overnight variety can more flexibly match intraday demand fluctuations.

Better Achieving Liquidity "Shaving Peaks and Filling Valleys"

Regarding the reason for adding the new tool, industry experts believe this is an important step in China's interest rate marketization reform process, consistent with the trading structure of China's interbank market and aligned with the evolutionary direction of international price-based monetary policy frameworks.

"From the perspective of China's money market operational structure, the overnight variety itself is the most concentrated maturity for liquidity trading in the interbank market (DR001 trading volume accounts for over 90%), with trading scale and market activity significantly higher than the 7-day variety. Therefore, its price changes can better reflect the marginal tightness of short-term liquidity in the banking system. Internationally, major central banks' monetary policy operations generally emphasize overnight interest rates." Xiong Yuan, chief economist of Guosheng Securities, explained.

Regarding the timing of the launch, Wen Bin, chief economist of Minsheng Bank, believes that conducting overnight reverse repo operations on June 29 and June 30 is mainly to cope with quarter-end liquidity pressure. He stated that since March, the central bank has proactively restrained liquidity injections to prevent excessive fund accumulation, with effects starting to show in late May. Under the combined impact of central bank operations, credit injections at the end of the quarter, and accelerated issuance of local government bonds, liquidity pressure has emerged, with funding rates rising significantly from late May. Additionally, commercial banks have stepped up credit supply at the end of the quarter, consuming excess reserves, and local government special bonds have been gradually issued more rapidly from mid-June, also creating some liquidity pressure.

Ming Ming, chief economist of CITIC Securities, also held a similar view. He analyzed to the Financial Times, "From the operational rhythm, the central bank's early announcement of 'adding' the operation, and specifying implementation on the last two days of June, the 29th and 30th, may reflect two pieces of information: First, the overnight reverse repo tool is currently positioned as a supplement to regular OMO (Open Market Operations), hence the expression 'adding'; second, choosing to operate at the end of June, considering that June is a major month for credit, with pressure from month-end credit surges and increased liquidity assessment pressure, this operation also reflects the central bank's stance of protecting liquidity."

From the operational mode, the fixed-rate, quantity-based bidding model is consistent with the 7-day reverse repo. "Since mid-2024, the 7-day reverse repo rate has been established as the main policy rate, also adopting a fixed-rate, quantity-based bidding model. The operational mode of this overnight reverse repo tool is similar." Mingming analyzed.

Continuous Improvement of Interest Rate Control Mechanism

"At a deeper level, this is an important step since the central bank constructed the interest rate corridor in 2024, upgrading the overnight reverse repo from a temporary tool to a regular variety, aimed at improving short-end control mechanisms. The introduction of overnight reverse repos, combined with the existing 7-day reverse repos to form a maturity pairing, helps achieve precise control and better meet different scenarios of banking system funding needs." Dong Ximiao analyzed.

Overall, the current central bank liquidity management tools have maturities including 7-day, 14-day, 3-month, 6-month, 1-year, and long-term. "The newly added overnight reverse repo supplements a tool with a 1-day maturity, further enriching liquidity injection methods, better meeting the diversified liquidity needs of financial institutions and enhancing the stability of fund operations." Wen Bin said.

As early as the Lujiazui Forum in June 2024, Pan Gongsheng proposed some considerations for reforming and improving the monetary policy framework, including clarifying the 7-day reverse repo operation rate in open market operations as the main policy rate and studying a moderate narrowing of the interest rate corridor width. Industry experts analyzed that the main operational variety of China's central bank in open market operations is the 7-day reverse repo, similar to the European Central Bank and the Bank of England, which can better balance operational precision and the pressure of rolling maturities. Over years of practice, it has also played a role as a market pricing anchor, effectively maintaining the stability of short-end rates.

"However, at month-end and other times, temporary funding needs of financial institutions increase. Overnight operations are more flexible and can better achieve the goal of liquidity 'shaving peaks and filling valleys'." Industry insiders noted.

In July 2024, the People's Bank of China announced the addition of temporary overnight positive and reverse repo operations, with operation rates set at the policy rate minus 20bp and plus 50bp, respectively. While highlighting the status of the policy rate, this effectively framed a narrower "soft corridor" for market rates, gradually reducing the volatility of short-end rates. At the 2026 Lujiazui Forum, Pan Gongsheng announced a further narrowing of the temporary repo's range width and improvement of the usage mechanism. Industry experts commented that this helps better leverage the anchoring role of the policy rate.

Experts interviewed believe that the central bank's addition of the overnight reverse repo operation variety this time is both a response to market demand and beneficial for enhancing the precision and effectiveness of short-end rate control. The specific operational arrangements for overnight reverse repos are mainly determined based on market demand. "This also reflects a gradual reform approach." Industry experts commented.

Source: Financial Times

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