PBOC Adopts 'Peak-Shaving' Stance: 7-Day Reverse Repo Operations Hit Zero for Second Day

According to the People's Bank of China (PBOC), the volume of 7-day reverse repo operations conducted on June 4 stood at zero, based on demand from primary dealers in the open market. This marks the second consecutive trading day with zero reverse repo volume. With RMB 101.3 billion in reverse repos maturing on the same day, the open market saw a net withdrawal of RMB 101.3 billion.

Data shows that while DR001 and DR007 experienced their typical seasonal decline at the start of the month, the 1-year AAA-rated commercial bank negotiable certificate of deposit (NCD) yield dropped to 1.4275% on June 1, hitting yet another record low. It remained at this depressed level on June 2, before ticking up slightly to 1.43% on June 3. Meanwhile, DR007 has been trading below the PBOC's 7-day reverse repo rate (1.40%) since April 3, falling to 1.3428% on June 3.

Market participants view this as one of the triggers behind two consecutive days of zero reverse repo volume, indicating that the cost advantage of borrowing from the central bank over raising funds in the interbank market has become less pronounced for commercial banks.

Wang Qing, chief analyst at Golden Credit Rating, believes this primarily reflects the absence of sustained, large-scale government bond issuance and moderate credit expansion in the near term, leading to reduced demand from commercial banks for central bank funding. He noted that against a backdrop of strong exports, rising price levels, and a recovery in certain property markets, the current macro-policy stance remains measured, with both fiscal spending and credit growth proceeding at a moderate pace—the main reason behind the current accommodative liquidity conditions in the banking system.

Wang further assessed that regulators are likely to strengthen coordination between fiscal and monetary policy in the coming period, guiding financial institutions to moderately increase credit supply. Additionally, based on current trends, outright reverse repo operations in both tenors may continue to shrink in June, which would help restore balance in market liquidity from both the supply and demand sides, guiding market interest rates to move smoothly around the policy rate.

Other market participants noted that the current easing of liquidity and the PBOC's continued reduction in various liquidity tools are essentially 'peak-shaving' in nature, and do not signal a shift in the moderately accommodative monetary policy stance. They argued that the central bank could still opt to implement reserve requirement ratio (RRR) cuts or policy rate reductions in the second half of the year, depending on domestic and international economic and financial conditions as well as inflation dynamics.