What signals are conveyed by the central bank's "extremely low" reverse repurchase operations?

Since April, the People’s Bank of China (PBOC) has continuously conducted “low-volume” 7-day reverse repo operations. Among them, the operation sizes on April 1 and April 2 were both 500 million yuan. This is the lowest level of operations for the PBOC since it established a regular daily open-market operations mechanism in February 2016, which has drawn widespread market attention.

In my view, the PBOC’s consecutive “low-volume” reverse repo operations are a routine adjustment under conditions of ample liquidity. They also directly reflect China’s monetary policy control framework transitioning from a quantity-based approach to a price-based one, making regulation more flexible and more precise. This is of great significance for maintaining stable operation of financial markets.

Behind “low-volume” reverse repo operations lies ample liquidity in the banking system. March, as a quarter-end month, typically features stronger fiscal spending. Meanwhile, the PBOC has also maintained strong support for liquidity. From the beginning of the year to the end of March, the PBOC has accumulated net injections of more than 1.65 trillion yuan of medium- to long-term funds through the MLF (medium-term lending facility) and outright reverse repos, creating favorable monetary and financial conditions for the market.

Market interest rates, as a “barometer” of liquidity, more directly confirm the prevailing easing in funding conditions. In March, the DR001 (the weighted average overnight pledged repo rate in the interbank market) averaged about 1.31%, staying at a low level. After entering April, DR001 has even continued to run below 1.3%, clearly indicating that short-term funding demand from financial institutions has declined and that the market is not “short of money.” Therefore, the PBOC, in line with the situation, has reduced short-term fund injections as a precise response to market supply and demand relations, rather than an intentional tightening of liquidity.

Accordingly, the market should also not simply judge whether monetary policy has turned by looking at changes in the size of open-market operations—especially the quantity change of any single open-market operation. Open-market operations are one of the ways the PBOC injects liquidity. Their scale is not only affected by the policy stance, but also disrupted by seasonal factors such as residents’ tax payments and cash withdrawals during holidays. Therefore, it would be hard to determine the direction of monetary policy correctly based solely on operation size.

In recent years, China has been steadily shifting toward a price-based monetary policy framework. The PBOC is gradually downplaying quantity-based targets and placing more emphasis on using price tools for regulation. The size of open-market operations more often serves the objective of interest-rate regulation. As stated by Zou Lan, Vice Governor of the People’s Bank of China, at a press conference held by the State Council Information Office in January this year: “Flexibly combine various tools of open-market operations to keep liquidity ample and guide overnight rates to run near the level of policy rates.” The recent “low-volume” open-market operations by the PBOC are precisely a manifestation of the PBOC operating more flexibly and more precisely. They both avoid funds getting stuck and also ensure stable operation of the money market—this is also the proper meaning of the monetary policy shift to price-based regulation.

From the policy tone, the current moderately accommodative monetary policy has not changed. Looking ahead, the PBOC will continue to make reasonable arrangements of tool types based on liquidity and market conditions, do a good job in liquidity management, and support the stable and healthy development of financial markets.

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Editor: Linlin Li