The People's Bank of China (PBOC) conducted a 500 billion yuan three-month (92-day) outright reverse repurchase agreement (repo) operation on August 5th, using a fixed quantity, rate-based bidding, and multiple-price award method to maintain ample liquidity in the banking system. The operation matures on November 5th, 2026 (postponed if falling on a holiday).

With 300 billion yuan in three-month outright reverse repos maturing on the same day, the net injection for August stands at 200 billion yuan. This brings the total outstanding balance of outright reverse repos to 6.3 trillion yuan. The PBOC recently held its second-half work conference, emphasizing the continuation of a moderately accommodative monetary policy.

Wang Qing, Chief Macro Analyst at Dongfang Jincheng, believes that medium-term liquidity tools, including outright reverse repos and Medium-term Lending Facility (MLF), are likely to see sustained expansion in the coming period. This is intended to support government bond issuance and bank-linked credit supply, representing a key lever for the current monetary policy to strengthen counter-cyclical adjustments.

The continuation of the three-month outright reverse repo in August, with a net increase of 200 billion yuan for the second consecutive month and at the same scale as the previous month, aligns with market expectations. Wang Qing points to two direct reasons behind this. Firstly, it helps maintain ample market liquidity and stabilize expectations. After the PBOC's moderate reduction in various open market operations earlier, major market rates broadly rebounded in June but stabilized in July. For example, the DR001 (weighted average of interbank collateralized overnight repo rates for depository institutions) and DR007 (the 7-day equivalent) have been stably trading near the policy rate of 1.4% in July, while the one-year commercial bank (AAA-rated) negotiable certificate of deposit (NCD) yield remained unchanged month-on-month. This suggests that after the reversal of the earlier excessively loose liquidity conditions, the potential for further upward movement in market rates is limited. The PBOC's restored net injection of medium-term liquidity in July, followed by the continued net increase in the three-month outright reverse repo in August, helps maintain ample liquidity and prevent excessive rate hikes, thereby stabilizing market expectations. Secondly, this supports the smooth issuance of government bonds. The July 30th Politburo meeting stated that "macro policy should be effective and accelerate the pace of fiscal expenditure and bond fund usage" in the second half. This points to a potential acceleration in government bond issuance in August. The increased outright reverse repo in August is conducive to supporting the smooth issuance of government bonds, reflecting coordination between monetary and fiscal policies.

Analysts at CITIC Securities, led by Chief Economist Ming Ming, note that the liquidity injection data for July 2026, released on August 4th, shows a net purchase of 50 billion yuan in government bonds in July, up from 10 billion yuan in June. Overall, short-term liquidity was stable in July, but long-term liquidity may face structural liability pressures. On the monetary policy front, the July Politburo meeting mentioned timely adjustments to monetary policy, while the PBOC's second-half work conference discussed "comprehensively utilizing repo, MLF, government bond trading, and other monetary policy tools to provide short-, medium-, and long-term liquidity," clarifying a stance that supports ample liquidity. In practice, the PBOC has continuously conducted overnight repos from late July to early August, and the increased government bond purchases in July, along with the sustained expansion of the three-month outright reverse repo in August, demonstrate the central bank's support for liquidity across short, medium, and long-term maturities. Looking ahead, against the backdrop of fiscal expansion in the third quarter, monetary operations are expected to remain accommodative. Reviewing historical trends, outright reverse repos have progressively increased from contraction to full renewal and then to continuous expansion, showing a gradual increase in volume. The PBOC's second-half work conference emphasized the comprehensive and timely use of monetary policy tools to maintain ample liquidity, guide financial institutions to enhance the balance of credit supply, and align the growth of social financing and money supply with economic growth and expected price levels.

On the funding side, on August 5th, the weighted average of DR001 was reported at 1.3485% intraday, while the weighted average of DR007 was at 1.3708%. Daily charts show both rates have generally declined in recent days. In the interbank lending market, the weighted average of the DIBO001 (overnight borrowing rate) was reported at 1.3697% intraday, also trending downward recently.

Wang Qing expects that macro policy in the second half will tilt towards stabilizing growth, including accelerating government bond issuance and promoting the implementation of the 800 billion yuan new-type policy-based financial instruments. Meanwhile, he believes the likelihood of a reserve requirement ratio (RRR) cut in the near term is low. This implies that medium-term liquidity tools like outright reverse repos and MLF will continue to be expanded, supporting government bond issuance and bank credit supply. This is a key area for the current monetary policy to strengthen counter-cyclical adjustments. Looking further ahead, Wang Qing analyzes that as the drag effect of earlier high oil prices on the global economy gradually emerges and external trade environments remain uncertain, China's export growth may trend downwards in the second half of the year, while domestic consumption and investment demand need a boost. Consequently, macro policy will gradually increase counter-cyclical adjustments. Considering that price levels are likely to remain moderate in the second half, there is also room for interest rate cuts and RRR cuts in monetary policy, while maintaining ample liquidity and further optimizing structural policy tools.