The People's Bank of China conducted 504 billion yuan in seven-day reverse repo operations on September 14, resulting in a net injection of 3.5 billion yuan across the public market, considering the 0.5 billion yuan seven-day reverse repo and 500 billion yuan outright reverse repo that matured the same day. During the previous week (September 7-11), the central bank's reverse repo operations saw a net withdrawal of 1.5 billion yuan. On Monday, the central bank rolled over the three-month outright reverse repo at the same scale, and on Thursday announced it would conduct overnight reverse repos of no more than 600 billion yuan over four days around the tax period. Reverse repo operations remained at minimal levels throughout the week, with net government bond payments rising in the first half and reserve requirement impacts from early in the month, yet liquidity stayed ample. In the second half, external disruptions eased, but the funding side marginally tightened, likely due to lag effects, pushing DR001 above 1.4%.
Funding conditions were relatively stable at the start of the week, with tightening concentrated in the latter half. On Monday and Tuesday, net government bond payments totaled 220.7 billion yuan, during which the central bank only injected 1.5 billion yuan through seven-day reverse repos. R001 held steady at 1.38%, while R007 fluctuated within the 1.40%-1.41% range, keeping the funding market broadly loose. On Wednesday, the central bank reduced reverse repo operations to zero, and as seven-day funds entered the period where they could span the tax deadline, overnight and seven-day funding rates rose in tandem. R001 climbed sequentially from Tuesday's 1.38% to Friday's 1.42%, while R007 rose from 1.41% to Thursday's 1.43%, before easing slightly to 1.42% on Friday.
Looking ahead to this week (September 14-18), the tax period (15-17) combined with substantial government bond payments is likely to test the funding market. However, the central bank has pre-announced its intention to resume overnight reverse repos during the tax period, which should keep funding volatility relatively contained, with the R001 center expected to stay within the 1.35%-1.40% range. On one hand, incremental pressure is likely to stem primarily from government bond payments, with net payments projected at around 633 billion yuan this week, elevating disruptions to the funding side. On the other hand, September's tax pressure is not particularly heavy, and the central bank's supportive signals are robust. Additionally, the central bank has already announced it will resume overnight reverse repo operations from September 14-17, with daily operations capped at 600 billion yuan, matching the scale and pace of August's operations, underscoring strong intentions to safeguard tax-period liquidity.
Furthermore, 500 billion yuan in outright reverse repos mature on September 14, but no related announcement was made on September 11. The central bank may opt to roll these over on September 15, which would both alleviate maturity pressures and support tax-period funding. Industry insiders suggest that while this week's overnight reverse repos can help offset mismatches between outright reverse repo injections and maturities, their short tenor and sub-600 billion yuan scale are insufficient to counter the significant decline in excess reserves. Thursday's central bank press conference also emphasized "guiding short-end money market rates to operate more smoothly around the policy rate," signaling that six-month outright reverse repos are likely to see over-rolling, and seven-day open market operations will probably expand. While funding conditions may tighten marginally, they are expected to remain within the 1.35%-1.45% range.
Sun Binbin, chief economist at Caitong Securities, analyzed that this week's convergence of the tax period, elevated government bond net payments, and the 500 billion yuan six-month instrument maturity creates notable funding market disturbances. Overnight reverse repos can provide partial offset, but the renewal of medium-to-long-term funds remains the key determinant of funding volatility. The central bank's stance on liquidity is expected to remain neutral-to-loose, with DR001 likely holding within the 1.35%-1.45% range.
Notably, as of September 11, the central bank had not yet announced the rollover arrangement for the six-month outright reverse repos. Based on historical patterns in central bank announcements, industry participants anticipate a rollover announcement on September 15. Since June 2025, the central bank has delayed rollover announcements for three-month or longer funding instruments on three occasions, all ultimately resulting in net injections. Therefore, delayed announcements themselves do not signal policy shifts, and market participants are advised to monitor the central bank's rollover announcement at the close of trading on September 14.
Lu Lei, Deputy Governor of the People's Bank of China, stated at a recent State Council Information Office press conference that during the "15th Five-Year Plan" period, the central bank will continue to refine the base money supply mechanism, improve the reserve requirement system, conduct open market operations with greater flexibility and precision, continuously enhance market-based interest rate formation, adjustment, and transmission mechanisms, strengthen the guiding role of policy rates, and steer short-end money market rates to operate more smoothly around the policy rate.
Ming Ming, chief economist at CITIC Securities, analyzed that the current positioning of overnight reverse repos is to hedge against short-end liquidity gap shocks. If funding conditions remain stable ahead of the tax period, overnight reverse repo operations are expected to maintain steady supply. As China's monetary policy framework transitions and policy places greater emphasis on price-based adjustments, the pace of reforming and refining the short-end interest rate adjustment framework has accelerated notably.