To maintain ample liquidity in the banking system, the People's Bank of China (PBOC) will conduct a 1 trillion yuan outright reverse repo operation on August 14, using a fixed quantity, interest rate bidding, and multiple-price award method. The operation has a term of 6 months (185 days) and matures on February 15, 2027 (postponed if it falls on a holiday).
Correspondingly, 1 trillion yuan of 6-month outright reverse repos mature on August 14. This operation therefore achieves a neutral rollover, keeping the outstanding outright reverse repo balance at 6.3 trillion yuan.
Additionally, starting from August 14, the PBOC will conduct overnight reverse repo operations for four consecutive trading days. This marks the first time the overnight reverse repo has been launched in the middle of the month since its creation.
Dongfang Jincheng's chief macro analyst, Wang Qing, commented that considering the overnight money market rate (DR001) has been consistently trading below the policy rate since August 4, this may be one reason the 6-month outright reverse repo was not expanded in August.
Linking the two operations, a team led by CITIC Securities' chief economist, Ming Ming, analyzed that the large volume of 6-month outright reverse repos maturing this time, combined with equal-value rollovers and subsequent overnight reverse repos to support liquidity, reflects a moderately loose monetary policy stance.
In August, the 6-month outright reverse repo was rolled over at an equal value. Wang Qing analyzed that the July operation for this tenor was expanded by 500 billion yuan, while the August operation for the 3-month outright reverse repo was expanded by 200 billion yuan. This means the total rollover amount for both tenors in August was expanded by 200 billion yuan, marking the second consecutive month of expansion.
"Considering the DR001 has been trading below the policy rate since August 4, this may be why the 6-month outright reverse repo was not expanded further in August," the Ming Ming team stated. On the open market operations front, although the PBOC has recently conducted zero net injections of 7-day reverse repos for several consecutive days, on August 12, the PBOC announced it would conduct overnight reverse repo operations on August 14 and from August 17 to 19, with each operation amount not exceeding 600 billion yuan. This demonstrates a commitment to maintaining stable funding during the tax payment period.
The large volume of maturing 6-month outright reverse repos, combined with equal-value rollovers and subsequent overnight reverse repos to support liquidity, reflects a moderately loose monetary policy stance. It also aligns with the policy statement in the second quarter monetary policy report, which called for "comprehensively utilizing and timely adjusting monetary policy tools" and the integrated use of short-, medium-, and long-term liquidity tools.
Regarding the mid-month launch of overnight reverse repos, Wang Qing believes the primary goal is to alleviate short-term liquidity tightness caused by the tax payment period, guiding the market overnight rate to operate smoothly around the policy rate.
The Ming Ming team suggests that this operation period covers the time for the month's 6-month outright reverse repo. Considering the tenors of the overnight reverse repo and the 6-month outright reverse repo, the two respectively address the short-term and medium-to-long-term liquidity gaps created by tax payments and reserve requirement days, demonstrating precise liquidity management.
As China's monetary policy control framework transitions and places greater emphasis on price-based regulation, the pace of reforming and improving the short-term interest rate control framework has notably accelerated. Industry experts indicate that the PBOC will continue to promote the reform and improvement of the monetary policy operations framework, maintain ample liquidity, and expect short-term money market rates to continue operating smoothly, further smoothing the transmission from policy rates to market rates.
On the funding front, on August 13, the weighted average DR001 rate was reported at 1.3634%, and the DR007 rate at 1.3917%, both up from the beginning of the month. In the interbank lending market, the weighted average DIBO001 rate was 1.3835%, and the DIBO007 rate was 1.4008% on August 13, also higher than early August.
Overall, Wang Qing believes that market rates did not deviate significantly below the policy rate in August. The continued expansion of outright reverse repo rollovers this month helps maintain ample liquidity and stabilize market expectations.
Notably, the Politburo meeting on July 30 stated that in the second half of the year, "macro policies must be proactive and effective, accelerating the pace of fiscal spending and the use of bond funds." This implies that government bond issuance will pick up speed in the latter part of the year. The PBOC's continued expansion of outright reverse repo rollovers in August is conducive to supporting the smooth issuance of government bonds, reflecting coordination between monetary and fiscal policies.
Looking ahead, Wang Qing analyzed that, overall, macro policies will lean towards supporting economic growth. This will include accelerating government bond issuance and expediting the implementation of the 800 billion yuan new type of policy financial instruments. These measures require the PBOC to provide liquidity support. This means that in the short term, medium-term liquidity tools, including outright reverse repos and MLF (Medium-term Lending Facility), are expected to continue expanding their rollovers to support government bond issuance and bank-matching credit deployment. This is a key area for the current monetary policy to increase counter-cyclical adjustment. It is also possible that the PBOC may implement a reserve requirement ratio (RRR) cut later, in which case the scale of outright reverse repo operations could be moderately reduced.