After 13 months of routine incremental rollovers, the Medium-term Lending Facility (MLF) saw its first reduction in operations this year. To maintain ample liquidity in the banking system, the central bank conducted a 400 billion yuan MLF operation on April 27, with a 1-year maturity, using a fixed amount, interest rate tender, and multiple-price winning bid method.
With 600 billion yuan of MLF maturing in April, this resulted in a net withdrawal of 200 billion yuan, officially ending the pattern of incremental rollovers that began in March 2025. Concurrently, outright reverse repo operations for two tenors (3-month and 6-month) were also reduced this month, resulting in a combined net withdrawal of 400 billion yuan. The coordinated action of these two medium-term liquidity tools led to a cumulative net withdrawal of 600 billion yuan in medium to long-term liquidity.
Industry analysts view the central bank's recent liquidity withdrawal operations as a signal to guide stability in the money market and prevent key market interest rates from deviating excessively below policy rates, which helps stabilize market expectations. However, this does not indicate a shift in the policy stance of maintaining ample market liquidity; it is more characteristic of smoothing out peaks and troughs.
In April, the central bank's operations for both the MLF and outright reverse repos featured unchanged rates alongside reduced volumes and net withdrawals, reflecting a approach of precise control. Regarding the MLF operation, the central bank conducted a 400 billion yuan 1-year MLF operation, with the winning interest rate held steady at 2.50%, consistent with previous levels. Compared to the 600 billion yuan in 1-year MLF maturing within the month, the 400 billion yuan operation on April 27 represented a 200 billion yuan reduction, resulting in a net withdrawal for the month. This marks the first net monthly withdrawal for the MLF since March 2025.
Furthermore, outright reverse repo operations for two tenors were also conducted with reduced volumes this month. On April 7, the central bank conducted an 800 billion yuan 3-month (89-day) outright reverse repo operation. Against 1.1 trillion yuan in 3-month instruments maturing within the month, this resulted in a net withdrawal of 300 billion yuan. On April 15, the central bank conducted a further 500 billion yuan 6-month (183-day) outright reverse repo operation. Against 600 billion yuan in 6-month instruments maturing, this resulted in a net withdrawal of 100 billion yuan.
Thus, the combined net withdrawal from outright reverse repos for the two tenors in April reached 400 billion yuan. Adding the 200 billion yuan net withdrawal from the MLF, the total net withdrawal of medium-term liquidity for April amounted to 600 billion yuan. In March, the net withdrawal volume was 250 billion yuan.
The net withdrawal from medium-term liquidity tools has now occurred for two consecutive months, with the scale of withdrawal significantly expanding. This is consistent with the recent consecutive minimal operations in the open market and is primarily due to the further easing trend in market liquidity since early April.
Looking at interest rate levels, data shows that the recent average for the DR001 has continued to operate below 1.3%. Since April 2, the yield on 1-year interbank certificates of deposit issued by AAA-rated commercial banks has fallen below 1.5%, frequently hitting record lows, indicating levels that are relatively low.
Reasons for the slightly low DR001 rate at this stage, besides the post-Lunar New Year cash回流 to the banking system and reduced liquidity demand at the start of the quarter, may also include an expansion in the bank foreign exchange settlement and sales差额 and an acceleration in fiscal expenditures.
Another perspective suggests that in January-February this year, the central bank utilized policy tools such as outright reverse repos, MLF, and government bond transactions to achieve a net injection of 2.05 trillion yuan in medium to long-term liquidity, a significant increase of 745 billion yuan compared to the same period last year. Meanwhile, bank credit extension in the first quarter was moderate, and net financing from government bonds declined in March. April is traditionally a slower month for credit, and the pace of government bond issuance has not noticeably accelerated. Additionally, the recent sudden changes in the Middle East situation led to widespread market expectations that the central bank would place greater emphasis on maintaining ample liquidity. The combined effect of these factors has led to a further easing trend in money market conditions since early April.
It is also noted that the central bank's moderate reduction in the volume of outright reverse repo and MLF operations signals to the market a stance of ease but not excess, guiding market rates to gently correct from excessively low levels towards the policy rate and preventing excessive deviation from the policy target.
In recent years, the Chinese central bank has持续推进 interest rate marketization reform, gradually forming an interest rate corridor mechanism where the 7-day reverse repo rate serves as the short-term policy rate, with the Standing Lending Facility rate as the ceiling and the excess reserve rate as the floor.
The Depository Institutions' Repo Rate is the benchmark rate in China's money market. The central bank primarily adjusts banking system liquidity through monetary policy tools, signaling policy rate adjustments. With the support of the interest rate corridor, it guides the market benchmark rate to fluctuate around the reverse repo rate.
In the central bank's open market reverse repo operations, primary dealers act as intermediaries transmitting liquidity from the central bank to the banking system. The 7-day reverse repo rate represents the cost for these dealers to borrow funds, while the DR rate essentially represents the return they earn when lending funds. Clearly, within the current monetary policy framework and the process of interest rate liberalization, the current situation where the DR rate is low creates an inverted cost-yield relationship that is unlikely to persist long-term.
It is anticipated that the central bank's liquidity withdrawal process will continue until key market rates rebound close to the policy rate. This includes sustained minimal operations in the open market, as well as net withdrawals via MLF and outright reverse repos. Once key market rates rebound near the policy rate, MLF and outright reverse repos are expected to resume net injections. This remains an important focal point for supporting government bond issuance this year, demonstrating the continuation of a supportive monetary policy stance.
Looking ahead, there is a view that the DR001 has a tendency to rise steadily. In practice, the central bank can flexibly调节 banking system liquidity. Furthermore, some spontaneous factors also influence banking system liquidity and the DR rate. Currently, the tax payment period is underway, and tax revenue payments will freeze liquidity in the banking system. Following this is the Labor Day holiday, during which demand for base money in the banking system typically rises ahead of the跨节 period. Over a longer horizon, factors like the expansion of the bank forex settlement-sales差额 and accelerated fiscal expenditures are也不太 likely to be sustained. Therefore, a steady increase in the DR001 seems almost within reach.
Current monetary policy is in an 'observation period.' The central bank is flexibly adjusting its pace based on the macroeconomic recovery, placing greater emphasis on targeted efforts. It aims to provide stronger support for key areas such as technological innovation, consumption stimulation, and small and micro enterprises through structural tools, while enhancing coordination with fiscal policy, rather than employing large-scale aggregate easing measures.
In the short term, as external uncertainties increase, domestic monetary policy, while maintaining ample market liquidity, may also阶段性 tilt towards stabilizing prices, potentially delaying the timing of interest rate cuts or reserve requirement ratio reductions. If external shocks significantly disrupt domestic economic growth later on, particularly if there are clear signs of slowing external demand, monetary policy would correspondingly increase the intensity of its适度宽松 stance. There is ample policy space in this regard.