The central bank's consecutive two-day large-scale operations do not change the overall easing of liquidity conditions.

Source: Financial Times

On April 2nd, the central bank conducted its second consecutive day of 500 million yuan 7-day reverse repo operations in the open market, while also adding a statement in the announcement that “full satisfaction of primary dealers’ demand” was met, with the policy rate (7-day reverse repo rate) remaining unchanged.

The central bank’s small-scale operations reflect a reduced demand for funds from market institutions. According to some financial institutions, at the end of March, the central bank increased liquidity injections to support cross-seasonal funding, coupled with concentrated fiscal expenditures at the end of the quarter, keeping liquidity ample in early April. Most institutions, considering their own liquidity management, did not report funding needs to the central bank in recent days. The addition of the phrase “full satisfaction of primary dealers’ demand” in the announcement also indicates that the central bank’s small-scale operations have not tightened liquidity, and the monetary policy remains moderately accommodative.

Wang Qing, Chief Macro Analyst at Orient Securities, analyzed that the continuous 500 million yuan 7-day reverse repos in the open market are primarily due to recent stable-to-easing liquidity conditions, along with the liquidity being ample at the beginning of the month. Additionally, this signals guidance for market liquidity to remain stable and to prevent major market interest rates from deviating excessively downward from the policy rate, which helps stabilize market expectations.

From the market perspective, the overnight interest rate in the money market remains low. In the first two months of this year, the central bank injected about 2 trillion yuan of medium- and long-term funds through outright repos and medium-term lending facilities (MLF), creating favorable monetary and financial conditions for a strong start to the economy. After the Spring Festival holiday, residents gradually deposited cash back into banks, supporting a continued loose liquidity stance. In March, the average daily overnight rate (DR001) in the money market was around 1.31%, continuing to decline from January and February levels. In early April, the overnight rate further fell below 1.3%, with a significant decrease in the demand for borrowing funds by financial institutions. The market does not need to overly focus on the volume of central bank tool operations.

“Yesterday’s open market 7-day reverse repo only involved 500 million yuan, with a net withdrawal of 78 billion yuan, yet liquidity remained ample,” explained industry experts. They noted that liquidity in the banking system is affected by changes in fiscal deposits and circulating cash, and the central bank maintains ample liquidity by flexibly conducting various operations to offset these factors. The expert also stated that observing liquidity conditions should not focus solely on changes in a single factor but should consider the combined impact of all factors in terms of volume. From this perspective, it is more appropriate to look at price changes, namely short-term interest rates. At a press conference in January, Vice Governor Zou Lan explicitly stated that the goal of open market operations is to guide overnight rates to operate around the policy rate. The recent small-scale operations in the open market are a reflection of the central bank’s more flexible and precise operations, and also a natural shift toward price-based regulation in monetary policy.