5 billion yuan reverse repurchase hits a 10-year low; liquidity is expected to remain relatively loose in April

Source: Shanghai Securities News Author: Zhang Xinran

Although since March the People’s Bank of China’s (PBOC) open market operations have become more concentrated, the liquidity conditions in the interbank market have not shown any obvious tightening. As the cross-month and cross-quarter time points approach, money market rates overall have stayed at low levels, and liquidity has continued a stable pattern.

On the first trading day in April, the PBOC drew market attention with a very low-volume operation: on April 1, the PBOC announced it would carry out a reverse repo operation of CNY 500 million for a 7-day term, with a winning interest rate of 1.4%. With CNY 78.5 billion in reverse repo maturing on the same day, the PBOC achieved net drainage of CNY 78 billion.

The scale of this reverse repo operation was the lowest level since 2015. Analysts believe that, against the backdrop of a somewhat loose funding environment, this signals the PBOC’s intention to stabilize and gradually tighten in a measured way—guiding rates to operate within a reasonable range. Overall, the liquidity environment is still expected to remain ample, but there is limited room for further large declines in interest rates.

March money market liquidity remained stable amid reduced injections

Looking back at March, the PBOC’s operation rhythm clearly moved toward balance, but market liquidity did not come under pressure as a result.

From an operational perspective: in the case of outright reverse repo, after a 9-month gap, it resumed with reduced issuance for the first time, with net drainage of about CNY 300 billion; reverse repos were mainly conducted through routine operations, with only a modest increase around the cross-quarter node; and the Medium-Term Lending Facility (MLF) saw a small net injection of CNY 50 billion. Overall, open market operations in March showed a marginal trend toward convergence.

However, funding prices still performed steadily: the overnight repo rate (R001) broadly stayed around 1.39% with narrow fluctuations, and there was no obvious rise during the tax-period stage either; the 7-day repo rate (R007) basically held near 1.50%, briefly rising to 1.52% at the beginning of the cross-quarter period, before quickly falling back, with the fluctuation range clearly lower than in the same period of previous years.

Zhao Zenghui, Chief Fixed Income Analyst at Changjiang Securities, told Shanghai Securities News reporter that from March 23 to 27, the PBOC achieved a net injection of CNY 231.9 billion through 7-day reverse repo operations, while maintaining appropriate hedging during the tax-period stage; key money market rates such as DR001, R001, DR007, and R007 all saw relatively limited volatility, indicating that overall supply and demand for market funds remained fairly balanced.

Institutions generally believe that in March, funding conditions remained resilient despite the PBOC’s reduced injection, which is closely related to the “stock support” formed by earlier large injections.

Wang Qing, Chief Macro Analyst at Orient Moody’s, told the reporter that in January and February, the PBOC accumulated net injections of about CNY 1.9 trillion of medium- to long-term liquidity through the MLF and outright reverse repo operations; combined with the relatively lower net financing scale of government bonds in March, liquidity at the banking system level overall remained ample. At the same time, around the end of the month and quarter, by increasing short-term reverse repo injections, the PBOC effectively smoothed volatility in the funding market.

“Very low-volume” operations signaled loosened liquidity expectations for April

Entering April, the PBOC strengthened the market’s expectation that liquidity would remain stable and slightly loose by conducting reverse repo operations with “very low volume.”

Wang Qing said that the CNY 500 million reverse repo operation on April 1 was the smallest scale since 2015. The direct reason is that the current funding market is already in a state of stable and slightly loose conditions. This also reflects the policy intention to guide market rates away from excessive declines.

From a seasonal pattern perspective, April’s funding rates typically fall more than in March. Institutional calculations show that over the past five years, the centroids of April’s R001 and R007 declined by about 15 basis points and 20 basis points, respectively, compared with the March averages. However, because this March’s funding rates were already at a relatively low level, market participants generally expect the rate drop in April to be less than historical averages.

From the perspective of supporting factors: end-of-month fiscal spending creates a funds rebound early in the month, which supplements banks’ liability side; April is usually a government bond issuance off-season, so the crowding-out effect on liquidity is relatively limited. A person from Western Securities expected that April’s net financing scale of government bonds may be between CNY 19k and CNY 9.3k, and marginal disruptions to the funding market are generally controllable.

Tan Yiming, Chief Fixed Income Analyst at Tienfeng Securities, said that the centroid of April funding rates usually stays at a relatively low level throughout the year. At the beginning of the quarter, credit disbursement tends to crowd out liquidity only relatively modestly. In addition, the PBOC’s intention to support is still present; therefore, the overall liquidity environment is expected to remain stable.

That said, institutions generally believe that April is a traditional period of large tax payments, and frictions during the tax-period stage are usually stronger than in March. Meanwhile, the maturing size of medium- and long-term funds in April is also larger than in March. Western Securities’ calculations show that the total maturing amount of medium- and long-term instruments such as 3-month and 6-month outright reverse repos and the MLF in April is about CNY 2.3 trillion, higher than the CNY 2.05 trillion in March. Against the backdrop that the balance of medium- and long-term funds is still at a historically high level, it is not ruled out that the PBOC will continue to conduct reduced issuance and roll over, draining part of the excess liquidity.

Zhao Zenghui also said that after the end of the cross-quarter period, in early April the funding market will most likely loosen marginally, but in the middle and later stages it will still be important to focus on factors such as tax-period pressure, the implementation schedule of newly introduced policy-based financial instruments, and the absorption situation of interbank deposits by banks. If these factors overlap, money market rates may still rise somewhat in mid-to-late month and around month-end.

(Editor: Wen Jing)

Keywords:

                                                            reverse repo