What signals are conveyed by the central bank's "extremely low" reverse repurchase operations?

Liu Qi

Since April, the People’s Bank of China has continued to carry out “low-volume” 7-day reverse repurchase operations. Among them, the operation size on April 1 and April 2 was both 500 million yuan. This was the lowest amount since the PBOC established a daily regular mechanism for open market operations in February 2016, which has drawn widespread attention from the market.

In my view, the PBOC’s consecutive “low-volume” reverse repo operations are a routine adjustment in a context of abundant liquidity, and they also provide a clear reflection of China’s monetary policy control framework transitioning from quantity-based to price-based, making policy control more flexible and precise. This is of important significance for maintaining stable operation of the financial markets.

Behind the “low-volume” reverse repo operations is abundant liquidity in the banking system. March, as the quarter-end month, saw strong government spending. At the same time, the PBOC has also maintained strong support for liquidity. From the beginning of the year to the end of March, the PBOC has accumulated net injections of more than 1.65 trillion yuan in medium- and long-term funds into the market through MLF (medium-term lending facility) and outright reverse repos, creating favorable monetary and financial conditions for the market.

As the “barometer” of liquidity, market interest rates more directly confirm the picture of ample funds. In March, the average of DR001 (the weighted average interest rate of overnight pledged repo in the interbank market) was about 1.31%, staying at a low level. After entering April, DR001 has continued to run below 1.3%, clearly indicating a decline in short-term funding demand from financial institutions, meaning the market is not “short of money.” Therefore, the PBOC’s move to reduce short-term fund injections is a precise response to the market’s supply-and-demand relationship, rather than an active tightening of liquidity.

Correspondingly, the market should not simply judge whether monetary policy has shifted by looking at changes in the amount of open market operations, especially the change in the volume of a single open market operation. Open market operations are one of the ways the PBOC injects liquidity. Their scale is affected not only by the policy stance, but also by seasonal factors such as residents paying taxes and cash withdrawals around holidays. Therefore, judging the direction of monetary policy solely by operation volume inevitably gives an incomplete picture.

In recent years, China has been steadily shifting toward a price-based monetary policy framework. The PBOC is gradually de-emphasizing quantity-based targets and placing more emphasis on the role of price-based policy control. Open market operation volumes are, more often, in service of interest rate control objectives. As stated by Zou Lan, Vice Governor of the People’s Bank of China, at a press conference held by the State Council Information Office in January this year: “Flexibly combine various tools of open market operations to keep liquidity ample and guide overnight rates to run near the level of policy interest rates.” The recent “low-volume” open market operations reflect the PBOC’s more flexible and more precise operations. They both avoid liquidity congestion and also ensure stable operation of the money market—this is also the proper meaning of the monetary policy shift toward price-based control.

From the perspective of the policy tone, the current moderately accommodative monetary policy has not changed. Looking ahead, the PBOC will continue to reasonably arrange tool categories based on liquidity and market conditions, do a good job in liquidity management, and support the stable and healthy development of financial markets.

(Editor: Wen Jing)

Keywords:

                                                            PBOC
                                                            Reverse repo