PBOC Reverse Repo Operations Drop to Zero: What’s the Signal? Experts Say Interbank Liquidity Too Loose, Aiming to Curb Idle Fund Circulation

Today, the People’s Bank of China’s 7-day reverse repo operations saw a rare drop to zero. In its morning announcement, the PBOC stated that based on demand from primary dealers in the open market, the volume of 7-day reverse repo operations on June 3 was zero. With 177.6 billion yuan in reverse repos maturing today, this resulted in a net withdrawal of 177.6 billion yuan from the open market.

Multiple industry insiders noted that the primary reason is excessively loose liquidity in the interbank market, with the market benchmark rate DR007 falling significantly below the PBOC’s policy rate of 1.40%. The central bank needs to withdraw excess liquidity to prevent idle funds from circulating within the financial system.

Some institutions believe the period of loosest liquidity may already be over. However, experts also point out that the PBOC consistently follows a “peak-shaving and valley-filling” strategy — injecting liquidity at month-end to support markets and allowing natural withdrawal through maturities at the beginning of the month. Therefore, the net withdrawal in early June is in line with historical practice. Going forward, the PBOC will continue to conduct preemptive fine-tuning based on changes in market interest rates.

Rare Zero Operation: Banking System Liquidity Excessively Loose

This is not the first time PBOC open market reverse repo operations have dropped to zero. On August 7, 2024, due to reasonably ample liquidity in the banking system, the reverse repo operation volume was also zero based on demand from primary dealers.

Dong Ximiao, Chief Economist at Zhaolian and Deputy Director of the Shanghai Finance and Development Lab, told reporters that this is not a signal of monetary policy shifting toward tightening. Rather, it reflects the PBOC conducting precise adjustments to actively “correct” market interest rates amid abundant liquidity.

Regarding such an unusual “floor-level” or zero-volume operation, Dong explained it is mainly because interbank market liquidity is excessively loose, with the representative market rate DR007 falling far below the PBOC’s 1.40% policy rate. The central bank needs to withdraw surplus liquidity to prevent idle fund circulation within the financial system.

Recent PBOC reverse repo operations have consistently been at floor-level volumes. On June 1 and June 2, the PBOC conducted only 11 billion yuan and a record-low 2 billion yuan in reverse repo operations, respectively, resulting in a cumulative net withdrawal of 673.4 billion yuan over three days.

In terms of market rates, DR007 had fallen to approximately 1.34% on June 2. Meanwhile, the 1-year AAA-rated commercial bank negotiable certificate of deposit yield dropped to 1.4275% on June 1, setting a new low, indicating a clear trend toward looser interbank liquidity conditions.

Wang Qing, Chief Macro Analyst at Golden Credit Rating, assessed that this suggests commercial banks’ cost advantage in borrowing from the central bank through 7-day reverse repos is no longer significant compared to interbank funding.

“This may primarily stem from the fact that government bond issuance has not continued to increase significantly in the near term, credit expansion remains moderate, and commercial banks’ demand for central bank funding has declined. Looking at this trend, outright reverse repos across both tenors in June may continue to shrink,” Wang told reporters.

Dong Ximiao pointed out that notably, the PBOC announcement explicitly stated the zero-volume operation was determined by demand from primary dealers, which indirectly confirms that commercial bank liquidity is highly ample and there is little willingness to supplement short-term funding.

Why is commercial banking system liquidity so abundant? “From a deeper background perspective, current real economy financing demand remains weak, and substantial liquidity is pooling within the financial system. This has driven bond yields down to 10-month lows — precisely the situation the PBOC seeks to guide and cool,” Dong noted.

“Current macro policy is maintaining restraint, with both government bond financing and credit expansion being moderate. This is the main reason banking system liquidity is currently loose,” Wang Qing said, adding that the recent continuous reduction of open market reverse repos to zero also signals an intention to stabilize funding conditions, prevent key market rates from deviating excessively below the policy rate, and guard against idle fund circulation.