Where to Begin

On August 14, the People's Bank of China (PBOC) executed a 1 trillion yuan outright reverse repo operation using a fixed quantity, interest rate tender, and multiple-price bidding method. The operation has a 6-month (185-day) term and matures on February 15, 2027.

Given that the same amount of 6-month outright reverse repos matured, this operation was a rollover, continuing to supply stable medium- to long-term liquidity to the market.

Unlike previous instances where the temporary overnight tool was primarily used near month-end, the PBOC also conducted a 349 billion yuan overnight reverse repo operation on the same day. After deducting the 1 billion yuan of 7-day reverse repos that matured, the open market operations resulted in a net daily injection of 348 billion yuan.

This is the first time since PBOC Governor Pan Gongsheng announced at the June Lujiazui Forum the enrichment of the short-term liquidity toolkit that the central bank has deployed an overnight reverse repo in the middle of the month. This move aims to precisely address the peak funding demand from mid-month tax payments and maintain stable liquidity conditions.

Boosted by ample liquidity and policy signals, long-term bond yields fell. The 10-year government bond yield edged down 1 basis point to 1.68%, hitting a new low since July 2025.

Coordinating Short, Medium, and Long-Term Instruments to Offset Tax Season and Smooth Liquidity

From a policy statement perspective, the PBOC's stated objective remains "keeping liquidity in the banking system ample."

According to the second-quarter monetary policy implementation report, the stock of aggregate social financing and broad money supply (M2) grew by 7.4% and 8.0% year-on-year, respectively, at the end of June. The average overnight rate in the money market, DR001, was 1.31% in the first six months, indicating generally stable operations.

The current 1 trillion yuan, 6-month outright reverse repo is part of the PBOC's "short-, medium-, and long-term matched base money injection mechanism." It effectively replenishes medium- to long-term funds and smooths out liquidity fluctuations across quarter-ends and year-ends.

Previously, on August 5, the PBOC conducted a 500 billion yuan, 3-month outright reverse repo operation, resulting in a net injection of 200 billion yuan compared to the 300 billion yuan in maturing instruments.

As the PBOC has suspended 7-day reverse repo operations for four consecutive working days, the precise addition of a 349 billion yuan overnight reverse repo during the mid-month tax period clearly reflects a granular control intent of "smoothing peaks and filling valleys, preventing flooding but ensuring ample supply."

Frances Cheung, Head of FX and Rates Strategy at OCBC, noted that given the previous suspension of 7-day reverse repos and the current tax payment demand, this injection scale is not massive. It indicates that the central bank's overall stance on liquidity management has not changed, aiming to smooth volatility rather than excessively flood the market.

Shift in Stance: From Net Drainage to Net Injection

Since July, the PBOC's liquidity operations have shifted from the net drainage seen in the second quarter to net injection.

From March to May, the PBOC continuously drained liquidity via MLF and outright repos, totaling over 1.35 trillion yuan. The goal was to "prevent excessive downward deviation of funding costs from the desired range" and "guide liquidity from excessive ease back to reasonable abundance."

In the second half of the year, through net injections via 3-month outright reverse repos, government bond purchases, and the innovative normalization of overnight reverse repo usage, the central bank fully supported government bond issuance and tax-related disruptions.

Simultaneously, the PBOC has not relaxed its risk prevention efforts: it continues to warn about herd behavior in the bond market and long-end yield risks, guarding against capital risks from crowded commercial bank duration positions. In the second quarter, it also cut rates on structural monetary policy tools by 0.25 percentage points, narrowed the temporary positive and negative repo operation range from 70 basis points to 50 basis points, established a dedicated 1 trillion yuan re-lending facility for private enterprises, and created an overseas central bank repo tool.

As the PBOC further increases the frequency and flexibility of overnight reverse repo operations, the transmission efficiency of policy rates to market rates will continue to improve. The smooth operation of short-term money market rates during key periods like tax season and month-end will be a core indicator for market observation going forward.