PBOC Conducts Overnight Reverse Repos Again Mid-Month to Steer Short-Term Money Market Rates Steady

Following August, the People's Bank of China (PBOC) has once again carried out four consecutive overnight reverse repo operations in mid-month. On Thursday, the central bank announced that it will conduct overnight reverse repo operations from September 14 to September 17, using fixed-rate, quantity tendering, with a daily operation volume of no more than 600 billion yuan.

Market observers told reporters from Cailian Press that the move is mainly aimed at easing the short-term tightening of market liquidity caused by tax-related payments, and at guiding the short-term money market rate (DR001) to run smoothly around the policy rate.

The market believes that the PBOC is accelerating the transition of its monetary policy framework toward a price-based regime, while the policy stance of maintaining ample liquidity remains unchanged.

At a State Council Information Office press briefing on Thursday, Lu Lei, Deputy Governor of the People's Bank of China, said that during the 15th Five-Year Plan period, the PBOC will conduct open market operations in a more flexible and precise manner, continuously improve the market-based mechanism for interest rate formation, regulation and transmission, strengthen the guiding role of the policy rate, and guide short-term money market rates to run more smoothly around the policy rate.

PBOC Steps Up Mid-Month Overnight Reverse Repos to Ease Tax-Period Funding Tightness

To better match the banking system's short-term liquidity needs, the central bank will conduct overnight reverse repo operations from September 14 to September 17, using fixed-rate, quantity tendering, with a daily operation volume of no more than 600 billion yuan.

To further improve the interest rate regulation mechanism and enrich the range of tool maturities, the PBOC added overnight reverse repo operations in June to better match financial institutions' short-term liquidity needs, conducted the first such operation at the end of June, and carried out mid-month overnight reverse repos for the first time in August.

Wang Qing, chief macro analyst at Dongfang Jincheng, told Cailian Press that September 15 is the unified deadline for filing and paying the month's major taxes. As a result, the central bank's renewed mid-month series of four consecutive overnight reverse repo operations, following August, is mainly intended to ease the short-term liquidity strain from tax payments and to guide the DR001 rate to run smoothly around the policy rate.

"We expect the PBOC to also conduct overnight reverse repo operations at the end of September. This shows that overnight reverse repo operations are becoming routine, aimed at smoothing funding fluctuations at specific points and guiding DR001 to run steadily around the policy rate, thereby advancing the transition of the monetary policy framework from a quantity-based to a price-based regime," he said.

PBOC Accelerates Monetary Policy Framework Transition; Market Rates to Run Steadier

At Thursday's press briefing, PBOC Deputy Governor Lu Lei said that during the 15th Five-Year Plan period, the central bank will continue to improve the base money issuance mechanism, refine the required reserve system, conduct open market operations in a more flexible and precise manner, continuously improve the market-based interest rate formation, regulation and transmission mechanisms, strengthen the guiding role of the policy rate, and guide short-term money market rates to run more smoothly around the policy rate.

The PBOC previously noted that overnight transactions now account for more than 90% of money market repo trading in recent years, and overnight financing has become an important tool for institutional liquidity management. Particularly at month-end and tax periods, some institutions' short-term liquidity needs may last only two or three days, and choosing overnight operations at such points can improve liquidity management efficiency and reduce costs for financial institutions.

Wang Qing believes that while the PBOC is accelerating the transition toward a price-based monetary policy framework, the policy tone of maintaining ample liquidity remains unchanged. The future trend for market rates is "steadier," and rate levels will mainly follow adjustments to the policy rate; short-term factors such as tax payments, government bond issuance proceeds, policy tool maturities, pre-holiday cash withdrawals and banks' month-end assessments will have a weakening impact on funding conditions.