The central bank conducted a RMB 1 trillion outright reverse repo operation to end the volume-reduced phase.

The People’s Bank of China (PBOC) recently issued an announcement saying it will conduct a CNY 1 trillion buyout-style reverse repo operation on July 6 using a fixed quantity, interest rate bidding, and multi-price bid-and-award format, with a term of 3 months (91 days). Given that the amount of this term maturing within the month is CNY 800 billion, the 3-month buyout-style reverse repo operation this time will increase and roll over to support, ending the ongoing process of shrinking issuance for this maturity over the prior consecutive three months.

In recent months, to prevent market interest rates from falling excessively and to guide the overnight funding rate (DR001) to stay around the policy rate, the central bank has moderately withdrawn liquidity through policy tools such as open market buyout-style reverse repos, the Medium-Term Lending Facility (MLF), and open market reverse repos. Since July, DR001 and DR007 have rebounded to around the policy rate (1.4%). The maturing yield on 1-year commercial bank interbank certificates of deposit (AAA-rated) has also risen to some extent.

“Previously, the market liquidity situation was on the loose side, and that has been reversed. As a result, the necessity to continue shrinking the 3-month buyout-style reverse repo in July has weakened.” Wang Qing, Chief Macro Analyst at Oriental Jiefang (DF) Credit, said that since July government bond issuance has maintained a relatively fast pace, and increasing the buyout-style reverse repo and rolling it over will also help support government bond issuance.

A research report from Citic Securities noted that, considering that some macro indicators have declined since the second quarter, the urgency for fiscal policy to step up has increased. Government bond supply is expected to significantly expand to meet the dual goals of stabilizing growth and ensuring progress on targets. It is expected that the size of government bond issuance in July will be high, and net financing may be around CNY 1.55 trillion, with supply pressure clearly higher than in June.

Overall, the maturing size of buyout-style reverse repos in July remains at a relatively high level within the year. In addition to the CNY 800 billion 3-month buyout-style reverse repo maturing at the start of the month, there is also CNY 900 billion of 6-month buyout-style reverse repo maturing in mid-month. Sun Binbin, Chief Economist at Caitong Securities, believes that the combination of the July buyout-style reverse repo maturity schedule, the concurrent expansion in government bond supply, and the early-quarter drainage of fiscal deposits will lead the direction of the liquidity environment in the second half of July. The PBOC may maintain a neutral-to-accommodative liquidity stance, supporting the smooth issuance of government bonds and helping banks increase credit and lending.

Over the past month, the 6-month buyout-style reverse repo has shifted from earlier shrinking to equal-amount rollover, while the MLF has implemented an increase-and-rollover. Wang Qing expects that in July the PBOC may fully restore net liquidity injections in the medium term, indicating a supportive monetary policy stance. After the recent introduction of the overnight reverse repo tool, the PBOC will flexibly carry out various open market operations based on changes in key market interest rates such as DR001, DR007, and the maturing yields on interbank certificates of deposit.

【Author: He Jueyuan】 (Editor: Wen Jing)

Keywords:

                                                            reverse repo