Breaking with convention! The central bank will conduct 1 trillion yuan in outright reverse repo operations. What signal does the first "advance notice" send?

Today, the People's Bank of China (PBOC) announced for the first time its intention to conduct outright reverse repo operations. The PBOC stated in its announcement that, to maintain ample liquidity in the banking system, it will carry out outright reverse repo operations worth 1,000 billion yuan on June 6.

Industry insiders told a reporter from Cailian Press that, against the backdrop of stable capital flows and bond market conditions, the PBOC's decision to break with convention and announce large-scale reverse repo operations at the beginning of the month may be related to the continuous peak in the maturity scale of interbank negotiable certificates of deposit (NCDs) in recent months.

Data shows that the maturity volume of interbank NCDs in June is expected to reach 4.2 trillion yuan, setting a new monthly record. The first and second halves of the month are the peak maturity periods, with approximately 920 billion yuan and 1.95 trillion yuan of NCDs maturing, respectively.

"June is typically a month with high credit demand, and financial institutions have significant funding needs. Advancing the outright reverse repo operations to June 6 helps financial institutions participate in tenders in a timely manner based on their own funding needs and make early liquidity arrangements," industry experts told a reporter from Cailian Press.

PBOC Announces Outright Reverse Repo Operations to Support Financial Institutions' Funding Needs

According to announcements on the PBOC's official website, from October 2024 to May this year, the PBOC has conducted outright reverse repo operations for eight consecutive months, with scales ranging from several hundred billion yuan to over one trillion yuan. The results of these operations were disclosed at the end of each month. Today, the PBOC announced for the first time the volume and maturity of its outright reverse repo operations, breaking with convention.

The PBOC stated in its announcement that, to maintain ample liquidity in the banking system, it will conduct outright reverse repo operations worth 1,000 billion yuan on June 6 through fixed-quantity, interest-rate tenders with multiple winning bids, with a maturity of three months (91 days).

"Today, the PBOC broke with convention by announcing large-scale outright reverse repo operations at the beginning of the month instead of at the end, attracting market attention," Wang Qing, Chief Macro Analyst at Dongfang Jincheng, told a reporter from Cailian Press. He said that, against the backdrop of stable capital flows and bond market conditions, the PBOC's decision to break with convention and announce large-scale reverse repo operations at the beginning of the month may be related to the continuous peak in the maturity scale of interbank NCDs in recent months. This helps maintain ample liquidity in the banking system, control capital flow fluctuations, and stabilize market expectations.

It is understood that outright reverse repo operations in the open market adopt fixed-quantity, interest-rate tenders with multiple winning bids. The underlying assets for repurchase include government bonds, local government bonds, financial bonds, corporate credit bonds, etc. The operations are targeted at primary dealers in open market operations and are conducted once a month in principle, with maturities not exceeding one year. The operation results will be disclosed through relevant sections on the central bank's official website.

"June is typically a peak month for credit, with relatively high funding demand from financial institutions. Advancing the outright reverse repo operations to June 6 allows institutions to participate in tenders promptly based on their liquidity needs and make advance arrangements. Injecting short-to-medium-term liquidity through outright reverse repos in early June helps maintain ample market liquidity at the half-year-end and ensures smoother financial market operations," said Dong Ximiao, Chief Researcher at Zhaolian and Deputy Director of the Shanghai Finance and Development Laboratory, to Cailian Press.

Wang Qing further noted that June will see maturities of 500 billion yuan in 3-month and 700 billion yuan in 6-month outright reverse repos, indicating the central bank will conduct a 500 billion yuan incremental operation for 3-month outright reverse repos on June 6. The overall outright reverse repo operations for June depend on whether the central bank issues new operation announcements by month-end.

"Additionally, following the rollout of a package of financial policy measures by the central bank and other departments on May 7, a current priority is incentivizing banks to increase credit support to the real economy and facilitate government bond issuance. The current expansion of medium-term liquidity injections signals continued strengthening of quantitative policy tools, which will help accelerate credit easing and enhance countercyclical adjustments," Wang Qing pointed out.

Dong Ximiao highlighted that under current conditions, the MLF bid rate remains relatively high, leading to declining demand from financial institutions. In this context, the central bank's advance notice of 1 trillion yuan in outright reverse repo operations serves as a substitute for maturing MLF, further reducing funding costs for financial institutions and alleviating pressure from narrowing interest margins.

Liquidity Remains Ample in Early Month with Limited Downside Room for DR007 Rate

Recent central bank interventions have stabilized early June liquidity. As of June 5, the overnight Shanghai Interbank Offered Rate (Shibor) stood at 1.408%, while the 7-day Shibor fell 0.9 basis points to 1.543%. The weighted average DR007 rate declined to 1.5509%.

Wang Qing told Cailian Press, "With the bank assessment period passed, liquidity has eased, and the decline in funding rates across maturities aligns with seasonal patterns. The central bank will continue using pledged reverse repos, MLF, and outright reverse repos to keep banking system liquidity ample."

Dong Ximiao projected that MLF rollovers would continue shrinking in the coming period, with outstanding balances steadily declining. The central bank will strengthen the regulation of market liquidity through various monetary policy tools and implement a moderately accommodative monetary policy.

CITIC Securities' fixed income department stated that in June, the disturbance of fiscal factors to funding conditions may marginally weaken. Considering the typically high credit issuance scale in June under the backdrop of banks' mid-year assessments, coupled with potential pressure on banks' liability side following the latest round of deposit rate cuts, funding conditions may struggle to achieve self-balancing. It is expected that the central bank will further inject medium and long-term liquidity through outright reverse repo operations and MLF. Overall, June's funding conditions are likely to maintain a supply-demand equilibrium, with the DR007 rate center fluctuating at lows slightly above the policy rate.

In June, the large maturity volume of interbank certificates of deposit (NCDs) is expected to be a major disturbance factor, but the market anticipates funding conditions will remain stable. Data shows that NCD maturities in June are projected to reach 4.2 trillion yuan, setting a historical monthly record. Among these, the early and mid-month periods are concentrated maturity points, with approximately 920 billion yuan and 1.95 trillion yuan of NCDs maturing, respectively.

Meanwhile, this week will see over 1.6 trillion yuan in reverse repo operations maturing, the largest scale for the same period in recent years. "The current situation is more similar to early May this year, when the central bank faced the same scale of maturities and chose to increase reverse repo operations for hedging. It is expected that the central bank will maintain a steady operational pace this week, easing the maturity gap through increased injections, with funding conditions likely to remain stable," said Jinchuan Xiao, co-chief macro analyst at Huaxi Securities.

"The cumulative maturity scale of NCDs in June is large, but it will not alter the basic trend of stable-to-declining NCD yields. However, given the current low long-end bond yields and regulators' continued focus on fund idling, the likelihood of a sharp decline in DR007, with the monthly average falling below the policy rate of 1.4%, is relatively small," noted Qing Wang.

Nevertheless, Wang pointed out that overall, there is ample room for a moderately accommodative monetary policy in H2, which will serve as an important support to hedge against external volatility, promote a reasonable rebound in price levels, and drive high-quality development. Under the combined effect of these factors, market interest rates in H2 still have some downside room.