5 billion yuan reverse repurchase hits a 10-year low; liquidity is expected to remain relatively loose in April

Source: Shanghai Securities News | Author: Zhang Xinran

Although since March the People’s Bank of China’s (PBOC) open market operations have shown some tightening in terms of frequency and intensity, the liquidity conditions in the interbank market have not tightened noticeably. Near rollover points such as month-end and quarter-end, funding interest rates overall have remained at low levels, and liquidity has continued a steady pattern.

On the first trading day of April, the PBOC drew market attention with a “record-low” reverse repo operation. In an April 1 announcement, the PBOC said it carried out a 5 billion yuan, 7-day reverse repurchase agreement operation, with the bid/contracted interest rate at 1.4%. Given that 785 billion yuan of reverse repos matured on the same day, the PBOC achieved a net cash drain of 780 billion yuan.

This reverse repo operation had the smallest scale since 2015. Analysts believe that against a backdrop of relatively loose funding conditions, this signals the PBOC’s intention to guide rates to operate in a reasonable range while stabilizing and gradually tightening. Overall, the liquidity environment is still expected to remain ample, but there is limited room for interest rates to keep falling significantly.

March funding conditions remained steady with reduced injections

Looking back at March, the PBOC’s operational cadence clearly moved toward balance, but market liquidity did not face pressure as a result.

From an operational perspective: For the outright repurchase (buyout) reverse repo, after a gap of 9 months, it resumed with a reduced volume for the first time; net cash drain was about 300 billion yuan. Reverse repos mainly relied on regular operations, with only modest increases around quarter-end. The Medium-term Lending Facility (MLF) saw a small net injection of 50 billion yuan. Overall, March’s open market operations showed marginal signs of convergence.

However, funding prices still performed stably. The overnight repo rate (R001) generally hovered around 1.39% with narrow fluctuations, and there was no noticeable rise during the tax-period stage. The 7-day repo rate (R007) basically stayed near 1.50%, briefly rising to 1.52% at the start of the quarter, and then quickly falling again, with much lower fluctuation than in the same period historically.

Zenghui Zhao, Chief Fixed Income Analyst at Changjiang Securities, said to a reporter from Shanghai Securities News: From March 23 to 27, the PBOC achieved a net injection of 231.9 billion yuan through 7-day reverse repo operations, while maintaining appropriate hedging during the tax-period stage. Key funding rates such as DR001, R001, DR007, and R007 all fluctuated within a fairly limited range, indicating that overall market supply and demand for funds remained relatively balanced.

Institutions generally believe that the reason March funding conditions maintained resilience despite the PBOC’s reduced injections is closely related to the “stock support” formed by earlier large-scale injections.

Qing Wang, Chief Macro Analyst at Dongfang Jincheng, told a reporter that in January and February, the PBOC accumulated a net injection of about 1.9 trillion yuan of medium- to long-term liquidity through the MLF and outright reverse repos. Coupled with a relatively low net financing scale of government bonds in March, liquidity at the banking system level remained broadly ample. At the same time, around month-end and quarter-end, the PBOC effectively smoothed funding-market fluctuations by increasing short-term reverse repo injections.

“Record-low” operations send a signal of April liquidity staying relatively loose

Entering April, the PBOC strengthened market expectations of liquidity remaining relatively loose by using “record-low” reverse repo operations.

Wang Qing said that the 0.5 billion yuan reverse repo operation on April 1 was the smallest since 2015. The direct reason is that current funding conditions are already in a stable-to-loose state, which also reflects the PBOC’s policy intent to guide market interest rates to avoid falling too far.

From a seasonal pattern perspective, April funding rates typically fall compared with March. Institutional calculations show that over the past five years, April’s central tendency for R001 and R007 fell on average by about 15 and 20 basis points, respectively, versus March averages. However, because this year’s March funding rates were already at a relatively low level, the market generally expects the decline in April rates to be smaller than the historical average.

From the perspective of supportive factors: Fiscal spending toward month-end forms a fund inflow at the beginning of the month, providing replenishment to banks’ liability side. April is usually a relatively quiet season for government bond issuance, so the crowding-out effect on liquidity is relatively limited. An official from China West Securities expects that April’s net financing scale of government bonds may be in the range of 0.93 trillion yuan to 1.03 trillion yuan, and marginal disruptions to funding conditions are generally controllable.

Tan Yiming, Chief Fixed Income Analyst at Tiansfeng Securities, said that April’s funding rate central tendency is usually at a relatively low level for the year. At the start of the quarter, credit injections tend to crowd out liquidity only to a limited extent. In addition, the PBOC’s intention to protect conditions remains in place, so the overall liquidity environment is expected to remain stable.

That said, institutions generally believe that April is a traditional major tax period, and tax-period fund outflows typically create more friction for funding conditions than in March. Meanwhile, the maturity scale of medium- to long-term funds in April is also higher than in March. China West Securities’ calculations show that in April, the total maturing amount of medium- and long-term instruments such as 3-month and 6-month outright reverse repos and the MLF is about 2.3 trillion yuan, higher than March’s 2.05 trillion yuan. Against the backdrop that the balance of medium- to long-term funds remains at a historically high level, it is not ruled out that the PBOC will continue to conduct reduced-volume follow-up operations to drain some redundant liquidity.

Zenghui Zhao also said that after the end of the cross-quarter period, liquidity is likely to ease at the margin early in April, but the tax-period pressure in the mid-to-late period, the rollout schedule for new policy-based financial instruments, and factors such as banks’ absorption of interbank deposits still need to be重点 monitored. If these related factors compound, funding interest rates may still rise to some extent in the middle-to-late month and around month-end.

(Editor: Wen Jing)

Keywords:

                                                            Reverse repo