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The central bank restarted net liquidity injections today by conducting a three-month outright reverse repo operation, signaling the end of several months of gradual liquidity withdrawal from the financial system.
The era of excess liquidity appears to be over, and analysts suggest that there’s no longer a need for continuous cash withdrawal. Moving forward, they expect the central bank to adopt a more balanced stance while ensuring sufficient liquidity levels.
On July 6, the central bank announced a plan to carry out a CNY 1 trillion (approximately USD 140 billion) 91-day outright reverse repo operation to keep plenty of funds available in the banking system. This operation, conducted through an interest-rate bidding process, will mature on October 5, with successful bids determined at multiple price points.
With CNY 800 billion of similar instruments maturing this month, this latest move results in a net addition of CNY 200 billion (about USD 29 billion), ending the previous pattern of reducing reverse repo balances.
Interest rates in the market edged closer to policy rates in June, prompting the central bank to adopt a more supportive approach, said Ming Ming, Chief Economist at CITIC Securities. The upcoming large-scale reverse repo maturing is also seen as a sign of the central bank’s intent to maintain flexible, medium- and long-term liquidity.
The period of loose market liquidity has concluded, reducing the need for persistent net liquidity reductions via three-month reverse repos, explained Wang Qing, Chief Macro Strategist at Golden Credit Rating International. Following a spike in government bond issuance at the end of June, issuance levels remained high into early July. Increasing the size of this month’s reverse repo rollover is expected to help ensure smooth government bond sales, he added.
Wang anticipates that the central bank will eventually resume net injections of medium-term liquidity, which should support government bond issuance and bank lending this year, aligning with the bank’s growth-friendly monetary policies.
Nonetheless, market participants believe short-term funding pressures remain. The first half of the year saw relatively slow government bond issuance, which might accelerate in the coming months. July is also a significant month for tax payments, and cash outflows related to taxes could temporarily tighten liquidity. Additionally, CNY 1.7 trillion (around USD 250.3 billion) of outright reverse repos and CNY 400 billion of medium-term lending facility loans are set to mature this month.
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