PBOC Unveils 500 Billion Yuan MLF and Overnight Reverse Repo Combo to Ease Month-End Liquidity

The People's Bank of China (PBOC) announced that it will conduct overnight reverse repo operations from August 27 to September 1 through fixed-rate, quantity-tender methods, with a daily cap of 600 billion yuan. At the same time, on August 25, the central bank will conduct a 500 billion yuan medium-term lending facility (MLF) operation with a one-year maturity.

Market participants believe that short-term liquidity demand at the end of August has increased due to factors such as bank assessment requirements. The PBOC's consecutive overnight reverse repo operations at this juncture help contain volatility in the overnight market rate DR001 and guide it to move steadily around the policy rate benchmark. The single overnight reverse repo operation on September 1 may be related to the large maturity of seven-day reverse repos on that day.

Given that 600 billion yuan of MLF matures in August, the 500 billion yuan rollover means a 100 billion yuan net contraction in August MLF operations, the first such contraction in nearly four months. However, considering that the central bank added 200 billion yuan through buyout reverse repos across two maturities, total medium-term liquidity operations for the month represent a net injection of 100 billion yuan, marking the second consecutive month of net injections, though the scale is 700 billion yuan lower than the previous month.

Increased Volatility at Month-End, PBOC Steps In to Stabilize Funding Conditions

As the month-end approaches, to maintain ample liquidity in the banking system, the PBOC will conduct a 500 billion yuan MLF operation on August 25 through fixed-quantity, multi-price bidding with a one-year maturity. With 600 billion yuan of MLF maturing in August, the rollover is 100 billion yuan lower, the first contraction in nearly four months, compared with a 100 billion yuan increase last month.

Month-end funding conditions may face some disturbances. Specifically, negotiable certificate of deposit (NCD) maturities this week will rise to 648.1 billion yuan, up from 521.1 billion yuan the previous week. Net government bond issuance payments will climb to 798.6 billion yuan, up sharply from 153.9 billion yuan last week, hitting a new single-week high for 2025.

However, Liu Yu, chief economist at Industrial Securities, pointed out that the PBOC's recent operations send a clear signal of maintaining stable funding rates. The launch of overnight reverse repos at the June and July month-ends and the first mid-month overnight injection in August during the tax period all reflect an approach of "smoothing peaks and filling troughs" to avoid sharp funding fluctuations. The central bank may coordinate through MLF rollovers and reverse repo injections. If injections are delivered as scheduled, overall funding conditions are expected to remain stable through the month-end.

Wang Qing, chief macro analyst at Orient Jin Cheng, told Cailianshe that there are two direct reasons for the second consecutive month of net medium-term liquidity injections in August. First, the recent overnight market rate DR001 has largely moved steadily around the policy rate, and the net injection in August helps keep funding conditions ample and stabilize market expectations. Second, government bond issuance is set to accelerate, with the third quarter being the peak issuance period for the year. Therefore, the consecutive net injections in August help support smooth government bond issuance, reflecting coordination between monetary and fiscal policy.

"The PBOC can manage both non-bank funding costs and fiscal-monetary coordination by adjusting short and long ends. Monetary policy objectives differ at different stages, so the central bank's stance must be judged by the combination of short- and long-end tools. Overall, credit control and fiscal support tend to rely on medium- to long-term tools such as buyout reverse repos and MLF, while controlling non-bank funding rate benchmarks tends to rely on short-term tools such as overnight reverse repos and seven-day reverse repos," noted Shenwan Hongyuan Securities.

If MLF is scaled back at month-end, attention should be paid to a possible shift in the PBOC's phased objectives and the risk of long-bond regulation.

PBOC Increases Overnight Reverse Repo Frequency, Accelerating Monetary Policy Framework Transition

Notably, the number of overnight reverse repo operations in August reached eight, significantly higher than three in July and two in June. Specifically, the PBOC will conduct four overnight reverse repo operations around the end of August (on August 27, 28, 31, and September 1), in addition to four reverse repo operations already conducted from August 14 to 19 (on August 14, 17, 18, and 19) and one overnight reverse repo operation on August 3.

At the same time, the central bank for the first time chose to concentrate overnight reverse repo operations in mid-August, with the timing extending from month-end to throughout the month. Dong Ximiao, chief economist at Merlin Financial, believes this marks the transition of overnight reverse repos from an "emergency tool" to a "normalized tool."

From the perspective of quantity-based operations, Dong said the two announcements convey two characteristics of the PBOC's liquidity management: first, an active shortening of maturity structure by reducing long-term operations and increasing short-term ones; second, a significant expansion in the scale of short-term tools. The core logic is "replacing long with short, broadly neutral to slightly contractionary." Although overall liquidity remains reasonably ample, the maturity of funds has clearly shortened and operation frequency has increased, making the central bank more sensitive to short-term market rate fluctuations. This means liquidity management is shifting from "broad easing" toward more precise adjustment and maturity optimization.

Wang Qing said this means overnight reverse repo operations are becoming normalized more quickly and have played an obvious role in effectively curbing volatility in the overnight market rate DR001. The underlying reason is that the PBOC is accelerating the transition of its monetary policy framework from a quantity-based to a price-based approach, placing greater emphasis on stabilizing short-term market rates. This also means DR001 will become "more stable," and the impact of mid-month tax outflows, government bond issuance payments, policy tool maturities, and month-end bank assessments will be significantly weakened.

PBOC Deputy Governor Zou Lan previously said at a State Council Information Office press conference that adding overnight reverse repo operations to regular open market operations helps enhance the precision and effectiveness of the PBOC's liquidity management and short-term rate control. Going forward, the PBOC will continue to steadily advance reforms to improve its monetary policy operation framework, better guide the overnight market rate to move steadily around the policy rate, and gradually increase the frequency of overnight reverse repo operations in line with primary dealer demand while maintaining communication with the market.