To better align with the short-term liquidity needs of the banking system, the People's Bank of China will conduct overnight reverse repurchase operations from September 28 to October 8, using a fixed rate and quantity-based bidding, with a daily operation cap of no more than 1 trillion yuan.
The daily ceiling for overnight reverse repos has been raised to 1 trillion yuan from 600 billion yuan in each of the previous three rounds, which is the most notable change in this operation.
Wang Qing, chief macro analyst at Oriental Golden Credit, said the cap was lifted from 600 billion yuan in the prior three rounds to 1 trillion yuan mainly because demand for overnight reverse repos rises around the National Day holiday, driven by residents withdrawing cash before the holiday, month-end bank assessments and the concentrated maturity of open market operations.
"By raising the daily operation cap, the central bank can fully meet the short-term funding needs of financial institutions, guide the short-end money market rate DR001 to move steadily around the policy rate, and more forcefully control its volatility," Wang said.
Ming Ming, chief economist at CITIC Securities, believes the move, on one hand, is intended to safeguard the interbank liquidity market amid seasonal upward pressure on cash demand, and on the other hand, is meant to achieve more refined liquidity management through overnight reverse repos, partially easing the impact of the cumulative maturity of longer-tenor reverse repos on the post-holiday liquidity market.
Wang expects the central bank may further increase the frequency of overnight reverse repo operations in the future, gradually replacing 7-day reverse repos and becoming the core policy tool for short-term liquidity adjustment.
Wang said the central bank is accelerating the shift of its monetary policy framework toward a price-based approach, but the policy stance of keeping liquidity ample remains unchanged. The short-end money market rate will trend "more steadily" going forward, while the rate level will follow adjustments in the policy rate, and the impact of short-term factors on funding conditions, such as tax-period payments, government bond issuance and payment, maturity of policy tools, cash withdrawals by residents before major holidays and month-end bank assessments, will tend to weaken.
Wang also judges that macro policy will lean further toward stabilizing growth next, including accelerating government bond issuance and speeding up the implementation of an 800-billion-yuan new policy-based financial instrument, which requires central bank support on the liquidity front. This means medium-term liquidity tools, including MLF and outright reverse repos, are expected to continue to be rolled over in larger amounts in the near term to support government bond issuance and banks' matching credit extension. This is an important focus of the current monetary policy in stepping up counter-cyclical adjustment. Later, a reserve requirement ratio cut by the central bank cannot be ruled out, and in that case the scale of MLF and outright reverse repo operations would be moderately reduced, as the two types of policy tools have a certain substitution relationship.
Regarding the monetary policy framework, PBOC Deputy Governor Lu Lei said at a press conference held by the State Council Information Office this month that during the "15th Five-Year Plan" period, China will further optimize the modern monetary policy framework with Chinese characteristics, making it more scientific and forward-looking in all links such as monetary policy objectives, tools and transmission. On tools, China will continue to improve the mechanism for injecting base money, refine the deposit reserve system and conduct open market operations in a more flexible and precise manner.