China's Central Bank Adjusts 14-Day Reverse Repo Operations: What Signal Does the Early Launch Send?

    On September 19, the People's Bank of China (PBOC) announced on its official website that it would adjust its 14-day reverse repurchase operations to a fixed-amount, interest rate bidding, and multiple-price auction system (i.e., American-style auction).

    Authoritative industry experts told Yicai that adopting American-style auctions for 14-day reverse repos further reinforces the policy significance of the 7-day reverse repo operation rate.

    Reviewing recent central bank activities reveals this as another measure to reinforce the policy rate status of the 7-day reverse repurchase.

    Following Governor Pan Gongsheng's 2024 address at the Lujiazui Forum, the central bank has continuously refined its operational framework, clarifying the policy significance of the 7-day reverse repurchase rate in open market operations. However, the 14-day reverse repo rate has long been set at 7-day plus 15 basis points, and market participants also view it as possessing certain policy attributes.

    The authoritative expert noted that with the switch to multiple-price bidding, the 14-day reverse repo will no longer have a uniform winning rate. This allows institutions to fully leverage their market-based pricing autonomy and better reflect their differentiated funding needs. The policy rate attributes of the 7-day reverse repo rate in the open market have become clearer.

    This adjustment to the 14-day reverse repurchase operation represents a further optimization of the central bank's liquidity management toolkit.

    The central bank's announcement mentioned that “the timing and scale of operations will be determined based on liquidity management needs.”

    Authoritative industry experts indicated that this signifies the 14-day reverse repurchase operation will be conducted flexibly based on the liquidity conditions within the banking system, rather than being confined to periods like the Spring Festival or National Day holidays as in the past. It serves as a supplement to the existing 7-day reverse repurchase operations in the open market.

    The central bank typically initiates 14-day reverse repurchase operations before the National Day and Spring Festival holidays, with timing flexibly adjusted based on holiday schedules and institutional demand to provide institutions with cross-holiday funding in advance and maintain ample liquidity. For example, last year's operation commenced on September 23, approximately one week before National Day.

    The aforementioned authoritative expert noted that this 14-day reverse repo operation commenced slightly earlier than in previous years, resulting in an effective funding period of 17 days. Combined with the central bank's prior net injection of 300 billion yuan through outright reverse repos, this move will further alleviate institutions' precautionary funding needs ahead of the quarter-end and extended holidays, ensuring stable liquidity conditions across both periods.

    Industry experts indicated that moving forward, the central bank could flexibly combine long-, medium-, and short-term operation instruments based on liquidity conditions and institutional demand to smooth the rhythm of fund injections and withdrawals, making liquidity management more precise and efficient.