After suspending the seven-day reverse repo for two consecutive days, the People's Bank of China (PBOC) announced on August 12, after the market closed, that it would conduct overnight reverse repo operations on August 14, and from August 17 to August 19.

This marks the first time the PBOC has conducted overnight reverse repo operations in the middle of the month. According to Wang Qing, Chief Macro Analyst at Dongfang Jincheng, the move is primarily aimed at alleviating the short-term tightening of market liquidity caused by tax payment periods, guiding the market's overnight rate (DR001) to remain stable near the policy rate.

Ming Ming's team at CITIC Securities, the Chief Economist, noted that the operation period coincides with the adjustment time for the August 6-month buyout reverse repo. The combination of overnight and buyout reverse repos addresses short-term and long-term liquidity gaps created by tax periods and reserve requirement days, reflecting precise liquidity management.

Starting August 14, the overnight reverse repo will be conducted for four consecutive trading days, using a fixed rate and quantity-based bidding, with a daily operation amount not exceeding 600 billion yuan. Ming Ming's team also pointed out that since August 15 is a Saturday, August 17 serves as both the reserve requirement day and the deadline for tax declaration. The overnight reverse repo operation covers the period from one day before the tax period to the T+2 period of tax payment, aligning with the short-term funding needs.

Regarding the scale, Ming Ming's team emphasized that the instruction for "daily operation amount not exceeding 600 billion yuan" likely means that the PBOC will combine seven-day and overnight reverse repos in a compound operation for these days, ensuring ample overall liquidity. The operation period also covers the adjustment time for the August 6-month buyout reverse repo, with the two types of repos addressing short-term and long-term liquidity gaps from tax periods and reserve requirement days, showcasing precise liquidity management.

Wang Qing further explained that since August 15 and 16 are Saturday and Sunday, August 17 is the unified deadline for the main August tax declarations. Thus, the PBOC's first mid-month overnight reverse repo operations aim to ease the short-term liquidity tightening from tax payments, guiding the DR001 to stay near the policy rate. Regarding the August 14 operation, Wang Qing noted it might be related to the expiration of 1 trillion yuan in 6-month buyout reverse repos, with the August buyout operation date set after August 14.

The PBOC's pre-announcement of the daily upper limit for mid-month overnight reverse repo operations, without specifying the exact amount, allows for flexibility based on financial institutions' actual needs. On August 13, the weighted average DR001 rate was 1.3608%, and the DR007 rate was 1.3918%, both slightly higher than earlier in the month, according to intraday data.

Wang Qing commented that the frequency of overnight reverse repo operations is increasing rapidly. He predicts that the PBOC will also conduct overnight reverse repos at the end of August, increasing the frequency from four times in July, which should help reduce DR001 volatility. Combined with the zero amount of seven-day reverse repo operations in the last two trading days and the mid-month overnight reverse repo, Wang Qing believes this indicates more precise control by the PBOC over market rates. This suggests that future market rate operations will become more stable, and overnight reverse repos may gradually replace seven-day reverse repos as the core short-term liquidity adjustment tool.

Wang Qing stressed that the PBOC is accelerating the shift of its monetary policy framework to a price-based approach, but the policy stance of maintaining ample liquidity remains unchanged. The future trend for market rates is "greater stability," with rate levels mainly following policy rate adjustments. Factors like tax payments, government bond issuance, policy tool maturities, and bank month-end assessments will have a weakening impact.

At a recent State Council Information Office press conference, PBOC Deputy Governor Zou Lan stated that the central bank will continue to steadily and orderly advance the reform and improvement of the monetary policy operation framework, better guiding the overnight market rate to operate stably near the policy rate. Based on the needs of primary dealers, the PBOC will study and gradually increase the frequency of overnight reverse repo operations and maintain communication with the market.