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The net withdrawal of 200 billion yuan (approximately 27.8 billion USD) from outright reverse repurchases this month doesn’t necessarily indicate a decline in these operations across China this month, industry analysts note.
Given the heightened liquidity gap in August, primarily driven by the pressures of long-term bond issuance and a slight increase in maturing negotiable certificates of deposit, China’s central bank is expected to continue its ongoing net injections of outright reverse repos, which began in June, to ensure ample liquidity. According to Ming Ming, Chief Economist at Citic Securities, this approach aims to stabilize the financial system amid current market pressures.
The central bank announced that today it will be adding 700 billion yuan through outright reverse repos to keep banking system liquidity sufficient. This operation will utilize a fixed-amount, interest-rate bidding, and multiple-price bidding method, with a maturity of three months. Since 400 billion yuan in three-month and 500 billion yuan in six-month outright reverse repos will mature today, the net effect for this month so far is a withdrawal of 200 billion yuan.
Experts predict that within this month, the central bank will likely conduct a six-month outright reverse repo operation, potentially raising total injected funds to over 900 billion yuan. Additionally, with 300 billion yuan of medium-term lending facility (MLF) loans maturing in August, the PBOC is expected to issue more to maintain net liquidity injection, according to Wang Qing, Chief Macroeconomic Analyst at Golden Credit Rating International.
The central bank introduced outright reverse repurchase operations at the end of October last year as a means of managing reasonable liquidity levels in the financial system. These operations are conducted through a fixed-amount, interest-rate bidding process, involving multiple winning prices, and are typically limited to primary dealers in the open market. Usually occurring once a month, they can have maturities of up to one year.
Experts highlight that the recent policies were influenced by the July 30 meeting of the Political Bureau of the Communist Party of China Central Committee, which called for accelerating government bond issuance and usage. This month is projected to be a peak period for bond issuance, with regulatory authorities consistently emphasizing the importance of guiding financial institutions to increase monetary and credit supply.
While short-term market liquidity is expected to stay relatively stable and abundant throughout August, some tightening pressures may emerge in the medium term. To mitigate this, the PBOC is anticipated to continue providing medium-term liquidity through MLF and outright reverse repos, Wang noted.
The likelihood of a reserve requirement ratio (RRR) cut in the near term appears low. Instead, the central bank is more inclined to maintain ample liquidity using tools like MLF and outright reverse repos.
However, recent data show that manufacturing PMI fell and remained in contraction territory last month after two months of recovery, signaling increased downward pressure on the economy. Wang added that the PBOC might consider reducing RRR or interest rates in the fourth quarter to support economic growth.
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