According to Wind data, a total of 272 billion yuan in 7-day reverse repurchase agreements will mature this week (September 21-24) in the central bank's open market operations. Experts indicate that the current liquidity provision approach is becoming more flexible and refined, with sufficient intensity to effectively offset major disruptive factors. Market rates are expected to remain stable across the month-end and quarter-end periods.
More refined liquidity regulation
The recent open market operations reveal distinctive characteristics of proactive support and demand-based liquidity allocation. Experts note that the combined deployment model involving overnight, 7-day, and 14-day reverse repos has significantly enhanced the flexibility of fund absorption and release. Specifically, during the mid-month tax payment period (September 14-18) which coincided with government bond settlement, the central bank announced in advance and conducted overnight reverse repos for four consecutive days, while also carrying out 7-day and 14-day reverse repos on select business days.
"Overnight reverse repo operations can further smooth the transmission of policy rates to market rates," said Zhao Zenghui, chief fixed income analyst at Changjiang Securities Research Institute. The coordinated use of 7-day and overnight reverse repos allows for more precise smoothing of short-term liquidity fluctuations, enhancing the efficiency of liquidity management. The gradual increase in the frequency of overnight reverse repo operations also indicates that the central bank is steadily advancing the refinement of short-end interest rate regulation mechanisms.
Meanwhile, regarding medium and long-term liquidity, the outright reverse repo mechanism is also being established. Ming Ming, chief economist at CITIC Securities, stated that based on monthly operational timelines, 7-day reverse repos are flexibly deployed, overnight reverse repos are conducted at the beginning, middle, and end of each month, outright reverse repos are carried out on the 5th and 15th of each month, and Medium-term Lending Facility (MLF) operations take place on the 25th. This creates a relay system of liquidity tools across various maturities throughout the month, jointly safeguarding ample interbank liquidity.
Early signals of supportive measures
Experts indicate that this week's cross-holiday demand, combined with substantial government bond settlement, may cause a moderate tightening of liquidity conditions; however, the probability of significant above-seasonal fluctuations remains low. Liu Yu, chief economist at Industrial Securities, stated that net government bond settlement this week is expected to reach 544.3 billion yuan. Although this represents a decline from the previous week's figure exceeding 600 billion yuan, it remains higher than historical averages and may cause some disruption to liquidity conditions. Nevertheless, with tax period pressures subsiding and the resumption of 14-day reverse repo operations, the central bank has already released early signals of support for cross-holiday and cross-quarter liquidity needs.
"Overall, liquidity conditions within the month should remain stable, with the central bank's supportive stance still evident. This is also the key reason why liquidity has remained stable in recent months with weaker-than-seasonal fluctuations," said Tan Yiming, chief fixed income analyst at TF Securities. Currently, 14-day reverse repo operations have commenced, and 7-day reverse repo supply has been relatively active. Additionally, overnight reverse repos are expected to be deployed again around the quarter-end to smooth liquidity volatility. Liu Yu anticipates that the central bank will continue to utilize a flexible combination of 7-day, 14-day, and overnight reverse repos to smooth interest rate fluctuations during the cross-quarter and cross-holiday periods.
Strengthening counter-cyclical adjustments
Experts suggest that multiple policy objectives, including economic growth and balance of payments equilibrium, currently point toward further room for monetary policy easing. "Monetary policy is expected to work in coordination with fiscal policy to maintain ample liquidity and mitigate significant fluctuations in liquidity conditions," said Zhang Di, chief macro analyst at China Galaxy Securities.
Wang Qing, chief macro analyst at Eastern Goldstone Credit, stated that macro policies will intensify efforts toward stabilizing growth, including accelerating government bond issuance and expediting the deployment of the 800 billion yuan new-type policy financial instruments. All of these measures require liquidity support from the central bank. "This implies that in the short term, medium-term liquidity tools including outright reverse repos and MLF are expected to see increased renewal volumes, supporting government bond issuance and matching bank lending. This represents an important focal point for the current monetary policy in strengthening counter-cyclical adjustments," Wang Qing added.
Lu Lei, deputy governor of the central bank, recently stated that the institution will continue to improve the base money supply mechanism, refine the deposit reserve system, and conduct open market operations with greater flexibility and precision. The central bank will also continuously enhance market-oriented interest rate formation, regulation, and transmission mechanisms, strengthen the guiding role of policy rates, promote more stable operation of short-term money market rates around policy rates, and further smooth the transmission from central bank policy rates to market benchmark rates and then to various financial market interest rates.