The central bank conducted a one-trillion-yuan outright reverse repurchase operation to close out the period with reduced trading volume.

The People’s Bank of China (PBOC) has recently issued an announcement saying that on July 6, it will carry out 1 trillion yuan worth of buyout-style reverse repo operations via fixed-quantity bidding, interest-rate bidding, and multi-price bidding. The term will be three months (91 days). Given that the amount of securities maturing in the month for this tenor is 800 billion yuan, the three-month buyout-style reverse repo operations will increase issuance and continue rollover to end the three-month trend of shrinking issuance for this tenor.

In recent months, to prevent market interest rates from falling too much and to guide the overnight funds rate (DR001) to trade around the policy rate, the central bank has moderately drained 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 maturity yield of one-year bank-issued negotiable certificates of deposit (AAA-rated) has also risen to some extent.

“An earlier situation of relatively loose market liquidity has already been reversed, so the need for continuing to shrink the three-month buyout-style reverse repo issuance in July has weakened.” Wang Qing, Chief Macroeconomic Analyst at Orient Securities (Eastingcheng), said that since July, government bond issuance has been maintained at a relatively fast pace, and increasing and rolling over buyout-style reverse repo operations is also conducive to supporting government bond issuance.

A research report from CITIC Securities points out that considering some macro indicators have declined since the second quarter, the urgency for fiscal efforts has increased. Government bond supply is expected to expand notably to balance the dual goals of stabilizing growth and meeting issuance progress. It expects the July government bond issuance scale to be relatively high, with net financing amount possibly around 1.55 trillion yuan, and supply pressure to be significantly higher than in June.

Overall, in July the maturity scale of buyout-style reverse repos is at a relatively high level for the year. In addition to the 800 billion yuan of three-month buyout-style reverse repo maturing at the beginning of the month, another 900 billion yuan of six-month buyout-style reverse repo will mature in mid-month. Sun Binbin, Chief Economist at Cathay Securities, believes that the combination of the July buyout-style reverse repo maturity schedule, the expanded government bond supply in the same period, and the early-quarter fiscal deposits rollover drawdown will determine the direction of liquidity conditions in mid-to-late July. The PBOC may maintain a neutral-to-loose liquidity stance, supporting the smooth issuance of government bonds and helping banks step up credit lending.

Over the past month, the six-month buyout-style reverse repo has shifted from previously shrinking issuance to maintaining the same amount for rollover, and the MLF has increased and rolled over. Wang Qing expects that in July the PBOC may fully restore net medium-term liquidity injections, showing a supportive monetary policy stance. After the introduction of the overnight reverse repo tool in the near term, the PBOC will flexibly conduct various open-market operations based on changes in key market interest rates such as DR001, DR007, and the negotiable certificate of deposit maturity yields.

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

Keywords: Reverse repos