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

Liu Qi

Since April, the central bank has continuously carried out “low-volume” 7-day reverse repo operations. Among them, the operation sizes on April 1 and April 2 were both 500 million yuan, which is the lowest level of operations since February 2016, when the central bank established a normalized daily open market operation mechanism. This has attracted widespread attention in the market.

In this author’s view, the central bank’s consecutive “low-volume” reverse repo operations are a routine adjustment under conditions of ample liquidity, and also an intuitive reflection of China’s monetary policy control framework transitioning from quantity-based to price-based, with more flexible and precise regulation. It is of great significance for maintaining the steady operation of financial markets.

Behind the “low-volume” reverse repo operations is ample liquidity in the banking system. March, as the end-of-quarter month, sees stronger fiscal spending. At the same time, the central bank has also provided substantial support to liquidity. Since the beginning of the year through the end of March, the central bank has累计净投放 more than 1.65 trillion yuan in medium- and long-term funds through MLF (medium-term lending facility) and outright reverse repos, creating favorable monetary and financial conditions for the market.

As the “weather vane” of liquidity, market interest rates more directly confirm the easing trend in the funding situation. In March, the DR001 (the weighted average interest rate of overnight pledged repo in the interbank market) averaged about 1.31%, and remained at a low level. After entering April, DR001 has even continued below 1.3%, clearly indicating that short-term funding demand from financial institutions has declined, and the market is not “short of money.” Therefore, the central bank, in line with the circumstances, reducing the injection of short-term funds is a precise response to the market’s supply-and-demand relationship, not an intentional tightening of liquidity.

Accordingly, the market should not simply judge whether monetary policy has turned around by looking at changes in the volume of open market operations—especially the volume of any single open market operation. Open market operations are one of the ways the central bank provides liquidity to the market. The scale is not only affected by the policy stance, but also disrupted by seasonal factors such as residents’ tax payments and cash withdrawals around holidays. Therefore, judging the direction of monetary policy solely by operation volume inevitably overlooks important aspects.

In recent years, China has been continually shifting toward a price-based framework for monetary policy regulation. The central bank is gradually downplaying quantity-based targets and placing more emphasis on the role of price-based regulation. The volume of open market operations serves the objective of interest rate regulation to a greater extent. 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 of this year: “Flexibly combine various tools of open market operations, keep liquidity ample, and guide overnight rates to run around the level of policy rates.” The recent “low-volume” open market operations are precisely a reflection of the central bank operating with greater flexibility and precision. They not only avoid the buildup of funds, but also ensure the steady operation of the money market—this is also the proper implication of the monetary policy shift toward price-based regulation.

From the perspective of the policy tone, the current moderately accommodative monetary policy has not changed. Looking ahead, the central bank will continue to reasonably arrange the types of tools, based on liquidity and market operating conditions, to do a good job in liquidity regulation, and to support the steady and healthy development of financial markets.

(Editor: Wen Jing)

Keywords:

                                                            Central bank
                                                            Reverse repo