The central bank conducts 1 trillion yuan of outright reverse repo operations, ending the process of reducing volume.

The People's Bank of China recently announced that it will conduct a 1 trillion yuan outright reverse repo operation on July 6 via fixed quantity, interest rate bidding, and multiple-price allocation, with a term of 3 months (91 days). Given that 800 billion yuan of this tenor is maturing in the same month, this 3-month outright reverse repo operation will achieve increased rollover, ending a three-month trend of shrinking volumes for this tenor.

In recent months, to prevent excessive declines in market interest rates and guide the overnight funding rate (DR001) to operate near the policy rate level, the central bank has moderately withdrawn liquidity through policy tools such as open market outright reverse repos, medium-term lending facilities (MLF), and open market reverse repos. Since July, DR001 and DR007 have rebounded to near the policy rate (1.4%), and the one-year commercial bank (AAA-rated) interbank certificate of deposit yield has also risen to some extent.

"The previous loose market liquidity situation has been reversed, and the necessity for further contraction of the 3-month outright reverse repo in July has diminished," Wang Qing, chief macro analyst at东方金诚 (Dongfang Jincheng), pointed out. Since July, government bond issuance has maintained a relatively fast pace, and the increased rollover of outright reverse repos is also conducive to supporting government bond issuance.

A research report from CITIC Securities noted that, considering the decline in some macro indicators since the second quarter, the urgency of fiscal policy has increased, and government bond supply is expected to significantly expand to meet the dual goals of stabilizing growth and making up for delays. It is estimated that the scale of government bond issuance in July will be relatively high, with net financing of around 1.55 trillion yuan, making supply pressure significantly greater than in June.

Overall, the maturing volume of outright reverse repos in July is at a relatively high level for the year. In addition to the 800 billion yuan in 3-month outright reverse repos maturing at the beginning of the month, 900 billion yuan in 6-month outright reverse repos will mature in the middle of the month. Sun Binbin, chief economist at Caitong Securities, believes that with the maturing outstanding outright reverse repos in July, combined with the supply of government bonds and the fiscal deposit withdrawal at the beginning of the quarter, the central bank's hedging operations—especially outright reverse repos and MLF rollovers—will dominate the direction of funding in mid-to-late July. The central bank may maintain a neutral to slightly loose liquidity stance to support the smooth issuance of government bonds and help banks increase credit supply.

In the past month, the 6-month outright reverse repo has shifted from a previous contraction to equal-volume rollover, and the MLF has achieved increased rollover. Wang Qing expects that in July, the central bank may fully resume net medium-term liquidity injection, signaling a supportive monetary policy stance. Following the recent introduction of the overnight reverse repo facility, the central bank will flexibly conduct various open market operations based on changes in major market interest rates such as DR001, DR007, and interbank certificate of deposit yields.

[Author: He Jueyuan] (Editor: Wen Jing)

Keywords:

                                                            Reverse Repo