From August 11 to 13, the central bank conducted no 7-day reverse repurchase operations for three consecutive days. Considering the maturing reverse repo balances, net withdrawals totaled 46.5 billion yuan, 5 billion yuan, and 1 billion yuan over the three days, respectively. This marks the second time this year the 7-day reverse repo issuance has fallen to zero, and the third instance since the mechanism shifted to a fixed-rate, quantity-based bidding system. Additionally, on August 12, the central bank issued an advance notice, announcing plans to conduct overnight reverse repo operations on August 14, 17, 18, and 19, with a daily cap of 600 billion yuan.

The central bank's multiple zero-operations on reverse repos may be linked to overheating in the bond market. Historically, there have been two main rounds of zero reverse repo operations prior to this: one on August 7, 2024, and another on June 3-4, 2026. On August 7, 2024, the central bank conducted its first zero reverse repo operation. On that day, the central bank stated that overall liquidity in the banking system was at a reasonably ample level, and based on demand from primary dealers in open market operations, the reverse repo volume was zero. A net withdrawal of 251.67 billion yuan occurred, with the 7-day reverse repo policy rate at 1.7% and the DR007 weighted average at 1.72%, meaning the market rate was about 2 basis points above the policy rate. Following the first zero operation, funding conditions tightened temporarily on the third trading day, prompting the central bank to restart large-scale net injections. On June 3 and 4, 2026, the central bank conducted zero 7-day reverse repo operations for two consecutive days—the first such occurrence. The central bank again cited primary dealer demand as the reason for zero issuance. Net withdrawals from these two zero operations were 177.6 billion yuan and 101.3 billion yuan, respectively. At that time, the policy rate had dropped to 1.4%, while the DR007 stood at 1.34% and 1.35% on June 3 and 4, respectively, both below the policy rate.

After a two-month gap, zero reverse repo operations reappeared. From August 11 to 13, the central bank again announced zero 7-day reverse repo operations, with maturing reverse repos totaling a net withdrawal of 52.5 billion yuan over the three days. Reviewing past instances of zero reverse repo operations, two key factors emerge: on one hand, it reflects the recycling of funds amid ample liquidity in the interbank market; on the other hand, it coincides with the bond market yield hitting sensitive levels. In August 2024, the central bank was focused on bond market risks, as the National Association of Financial Market Institutional Investors investigated illegal activities in government bond trading by some small and medium-sized financial institutions. The central bank simultaneously signaled a correction to the bond market, where long-end rates were too low, by reducing quantitative supply in open market operations. In early June 2026, interbank liquidity was broadly ample, with money market rates below the policy rate. The 10-year government bond yield broke below the key 1.7% level, and the 30-year bond yield reached a year-to-date low of 2.19%. From August 11 to 13, 2024, interbank liquidity remained ample, with money market rates below the policy rate, while the active 10-year government bond yield once again breached the 1.7% threshold. This prompted the central bank's zero reverse repo operations.

Liu Yu, Deputy Director of the Institute of Economics and Finance at Industrial Securities, believes that summarizing the two previous rounds of zero reverse repo operations reveals different driving factors. The first round was more of a passive contraction driven by reduced credit demand and a spontaneous easing of funding conditions, with the substantial adjustment shock coming from the external event of the self-regulatory investigation by the trading association. The adjustment in the funding and bond markets was rapid and significant. The second round, however, was an active signal from the central bank aiming to curb the one-sided expectation of falling bond yields. Currently, the spontaneous easing of the interbank market's funding conditions is not yet stable. The underlying logic of the current zero reverse repo operations may lean more toward the latter scenario, meaning the policy signal is more pronounced. Notably, on the day of the current zero operations, the bond market underwent a broad adjustment, but the magnitude was relatively limited. If the central bank's corrective action fails to push the 10-year government bond yield back to around 1.75%, it would reflect a weakening of intervention this time. The market's one-sided expectations would not only remain unchanged but could be strengthened, potentially leading to a substantive break below 1.7% for the 10-year bond yield. Conversely, if the central bank continues its tightening operations and pushes the 10-year yield back to near 1.75%, the bond market may re-enter a range-bound fluctuation.

Overnight reverse repos may become the central bank's core policy tool for short-term liquidity management. On August 12, the central bank announced that to better match the short-term liquidity needs of the banking system, it would conduct overnight reverse repo operations on August 14 and August 17-19, using a fixed-rate, quantity-based bidding system with a daily cap of 600 billion yuan. Since August 15 and 16 fall on a Saturday and Sunday, this effectively means four consecutive trading days of operations, marking the first time the central bank has conducted overnight reverse repos mid-month. Wang Qing, Chief Macro Analyst at Dongfang Jincheng, believes that the central bank's mid-month overnight reverse repo operations are primarily aimed at alleviating the short-term tightening of market liquidity caused by tax payment transfer periods, guiding the market overnight rate (DR001) to operate smoothly near the policy rate. The operation on August 14 may also be related to the maturity of 1 trillion yuan in 6-month outright reverse repos, with the August 6-month outright reverse repo operation date falling after the 14th. The advance announcement of the daily cap for mid-month overnight reverse repo operations, without specifying the exact volume, reflects operational flexibility based on actual financial institution demand. Wang Qing points out that the frequency of overnight reverse repo operations is increasing rapidly, which helps reduce the volatility of DR001. The zero operation of 7-day reverse repos over the past two trading days, combined with the mid-month overnight reverse repo operations, indicates that the central bank's regulation of market rates is becoming more precise, suggesting that market rate operations will become more stable in the future. "This may mean that overnight reverse repos could gradually replace 7-day reverse repos as the central bank's core short-term liquidity management tool. Further, it could pave the way for the overnight reverse repo rate to replace the 7-day reverse repo rate as the primary policy rate," Wang Qing added. It should be noted that the central bank is accelerating the transition of its monetary policy framework toward a price-based model, but the fundamental policy stance of maintaining ample liquidity remains unchanged. The future trend of market interest rates will be "more stable," with rate levels primarily tracking policy rate adjustments. The influence of factors such as tax payment transfers, government bond issuance and settlement, policy tool maturities, and banks' end-of-month assessments will tend to weaken.