500M yuan reverse repurchase hits 10-year low; liquidity expected to remain relatively loose in April

◎ Reporter Zhang Xinran

Although the People’s Bank of China’s open market operations have eased since March, interbank market liquidity has not shown a significant tightening. As the month crosses over into new periods, overall funding rates remain low, and liquidity continues to stay stable.

On the first trading day of April, a “minimal” operation by the central bank drew market attention: the PBOC announced on April 1st that it conducted a 500 million yuan 7-day reverse repo operation at a winning rate of 1.4%. With 78.5 billion yuan of reverse repos maturing on the same day, the central bank achieved a net withdrawal of 78 billion yuan.

This reverse repo operation was the smallest scale since 2015. Analysts believe that, in a context of relatively loose liquidity, this signals the central bank’s intention to maintain steady policy and guide interest rates within a reasonable range. Overall, liquidity is expected to remain ample, but there is limited room for rates to decline significantly further.

Liquidity remained stable in March amid reduced injections

Looking back at March, the pace of central bank operations became more balanced, but market liquidity was not under pressure as a result.

From an operational perspective: the buy-and-repurchase (repo) operations, which had paused for nine months, resumed with reduced volume, netting out approximately 300 billion yuan; regular repos were the main activity, with moderate increases at period transitions; the Medium-term Lending Facility (MLF) saw a slight net injection of 50 billion yuan. Overall, March’s open market operations showed a trend of marginal convergence.

However, funding costs remained stable: the overnight repo rate (R001) mostly fluctuated around 1.39%, with no significant upward movement during tax periods; the 7-day repo rate (R007) stayed near 1.50%, briefly rising to 1.52% at the start of the period before quickly falling back, with volatility much lower than in historical periods.

Zhao Zenghui, Chief Fixed Income Analyst at Yangtze River Securities, told Shanghai Securities News: “From March 23 to 27, the central bank achieved a net injection of 231.9B yuan through 7-day repos, maintaining moderate hedging during tax periods; major funding rates like DR001, R001, DR007, and R007 showed limited fluctuations, indicating that overall market supply and demand remained balanced.”

Institutions generally believe that the resilience of liquidity in March, despite reduced central bank injections, is closely related to the “stock support” formed by previous large-scale injections.

Wang Qing, Chief Macro Analyst at Orient Securities, told reporters that from January to February, the central bank’s net long-term liquidity injections via MLF and buy-and-repo totaled about 1.9 trillion yuan, and with relatively low net government bond financing in March, the overall liquidity in the banking system remained ample. Meanwhile, at month-end and quarter-end, the central bank increased short-term repo injections to effectively smooth liquidity fluctuations.

“Minimal” operation signals looser liquidity in April

Entering April, the central bank’s “minimal” reverse repo operations reinforced market expectations of slightly looser liquidity.

Wang Qing said that the 500 million yuan reverse repo on April 1st was the smallest since 2015, mainly because liquidity has already been in a relatively loose state, reflecting the policy intention to guide interest rates away from excessive decline.

Seasonally, funding rates in April typically fall compared to March. Estimates show that over the past five years, the median of R001 and R007 in April has decreased by about 15 and 20 basis points respectively from March averages. However, since rates in March were already low this year, the market generally expects that April’s rate decline may be less than the historical average.

Supporting factors include: at month’s start, fiscal expenditures lead to fund inflows, supplementing bank liabilities; April is usually a slow season for government bond issuance, with limited impact on liquidity. Huaxi Securities expects that net government bond financing in April will be between 19k and 1.03 trillion yuan, with overall marginal disturbance to liquidity being manageable.

Tan Yiming, Chief Fixed Income Analyst at Tianfeng Securities (Rights Protection), said that the median funding rate in April is usually at its lowest for the year, with limited impact from initial credit injections, and the central bank’s continued support policies suggest liquidity should remain stable.

However, institutions generally believe that April, being a major tax period, tends to cause more friction in liquidity due to tax payments. Additionally, the scale of medium- and long-term maturing funds in April is higher than in March. Huaxi Securities estimates that the total maturity of 3-month and 6-month buy-and-repos, MLF, and other medium- and long-term instruments will be about 2.3 trillion yuan, higher than March’s 2.05 trillion yuan. Given that medium- and long-term funds are still at historically high levels, the central bank may continue to reduce operations to withdraw some excess liquidity.

Zhao Zenghui also noted that after the cross-season period, liquidity is likely to marginally loosen in early April, but attention should be paid to tax period pressures, the pace of new policy financial instrument implementation, and banks’ absorption of interbank deposits. If these factors align, interest rates may rise somewhat in mid- and late-April.