Central Bank Announces Second Round of Outright Reverse Repo Operations, Continuing to Increase Medium-Term Liquidity Injections and Sending a Signal of Sustained Strengthening of Monetary Policy Tools

Today, the People's Bank of China (PBOC) announced that it will conduct 400 billion yuan of outright reverse repo operations on June 16, marking the second announcement of such operations by the PBOC this month.

Earlier in June, the PBOC had announced the conduct of 1 trillion yuan of 3-month outright reverse repo operations. Considering that a total of 1.2 trillion yuan of outright reverse repos will mature throughout June, the PBOC's two announcements imply a net injection of funds for the entire month.

Industry insiders told a Caixin reporter that June is a critical period for semi-annual liquidity assessments, coupled with factors such as the large-scale maturity of interbank negotiable certificates of deposit (NCDs), leading to a higher demand for liquidity from financial institutions throughout the month. The PBOC's provision of medium-term funding support reflects its care for the market.

"Building on the approximately 1 trillion yuan of long-term liquidity released through RRR cuts by the PBOC in May, the increase in outright reverse repo operations in June, continuing to boost medium-term liquidity injections, will help maintain ample liquidity in the banking system and control fluctuations in the funding market amid the continuous large-scale issuance of government bonds and the 'peak' period of interbank NCD maturities in recent months," an industry source told Caixin.

PBOC Announces Second Round of Operations This Month, Continuing to Boost Medium-Term Liquidity Injections

To maintain ample liquidity in the banking system, the PBOC first announced on June 5 and then conducted 1 trillion yuan of outright reverse repo operations on June 6. Just a week later, the PBOC announced its second round of operations today.

Today, the PBOC announced that it will conduct 400 billion yuan of outright reverse repo operations on June 16 through fixed-quantity, interest-rate tendering, and multiple-price bidding, with a tenor of 6 months (182 days). Data shows that 500 billion yuan of 3-month and 700 billion yuan of 6-month outright reverse repos will mature in June, respectively, implying a net injection of 200 billion yuan of outright reverse repos by the PBOC for the entire month as of June 16.

"Building on the approximately 1 trillion yuan of long-term liquidity released through RRR cuts by the PBOC in May, the increase in outright reverse repo operations in June, continuing to boost medium-term liquidity injections, will, on the one hand, help maintain ample liquidity in the banking system and control fluctuations in the funding market amid the continuous large-scale issuance of government bonds and the 'peak' period of interbank NCD maturities in recent months," Wang Qing, chief macro analyst at Dongfang Jincheng, told a Caixin reporter.

Why did the PBOC choose to announce twice in June to manage market expectations? It may be related to June being a traditional critical period for liquidity management, with the funding market facing a "major test" amid multiple pressures. Haitong Asset Management pointed out that the concentrated impact of the peak maturity of interbank NCDs, with a total maturity of over 4 trillion yuan in June, has widened the short-term funding gap for banks. Meanwhile, financial institutions also need to cope with the "regular challenge" of quarter-end liquidity assessments, coupled with a surge in funding demand driven by the accelerated issuance of government bonds, further highlighting the supply-demand imbalance in the funding market.

Everbright Securities Finance stated that, considering the seasonal trend, short-term funding rates in June have generally shown a pattern of "pulling back at the beginning of the month and rising in the latter part" in recent years. Given that the end of June coincides with semi-annual financial reports and assessments, liquidity management will be arranged in advance, and the pressure is not expected to last until the last two days of the month.

"The intensity and pace of loan issuance squeezing the excess reserve ratio, thereby affecting the willingness of national banks to lend funds; it is estimated that the net financing scale of government bonds in June will still be around 1 trillion yuan, which may cause temporary disruptions; in addition, there will be a concentration of NCD maturities in late June, along with a surge in credit, making the MLF issuance volume worth watching," pointed out Wang Yifeng, Chief Analyst of Everbright Securities' Financial Industry.

Wang Qing noted that this move also signals the continuous strengthening of quantitative monetary policy tools, which helps to promote the broadening of credit and enhance countercyclical regulation. "The disclosure of outright reverse repo operations from the end of the month to an earlier release indicates an increase in the transparency of monetary policy operations, which can more effectively guide and stabilize market expectations."

In June, the maturity of negotiable certificates of deposit (NCDs) is expected to transition smoothly with no significant changes in volume or price.

Looking ahead to June, the large amount of maturing NCDs is one of the main disruptive factors, but the market expects a smooth transition in terms of liquidity. Data shows that the expected maturity of NCDs in June will reach 4.2 trillion yuan, setting a record for the highest single-month figure. Among these, the early and mid-month periods are the concentrated maturity points, with about 920 billion yuan and 1.95 trillion yuan of NCDs due to mature, respectively.

Wang Yifeng believes that under the current circumstances, the primary factor disrupting the interest rate on NCDs in June is the large volume of maturities, with 4.2 trillion yuan due to mature in the month, an increase of 1.7 trillion yuan compared to May, reaching a peak for monthly maturities in recent years, increasing the pressure on banks to roll over. However, there are offsetting factors that may result in the renewal volume of NCDs in June being less than the maturing volume. Although NCDs face significant maturity pressure in June, constrained by multiple factors, the overall volume and price levels are not expected to change significantly from previous levels.

CITIC Securities Fixed Income Department stated that, looking ahead to June, the disturbance to liquidity from fiscal factors is expected to weaken marginally. Considering the high credit issuance scale typically seen in June due to the bank's semi-annual assessment, coupled with the potential pressure on the liability side after the implementation of a new round of deposit rate cuts, it may be difficult for the liquidity to achieve a spontaneous balance. It is anticipated that the central bank will further inject medium and long-term liquidity through outright reverse repo operations and MLF, and the overall liquidity in June is expected to maintain a balanced supply and demand pattern, with the DR007 interest rate center fluctuating at lows slightly above the policy rate level.

"In the future, the central bank will also comprehensively utilize medium- and short-term liquidity management tools such as pledged reverse repo operations, Medium-term Lending Facility (MLF), and outright reverse repo operations to maintain abundant liquidity in the banking system. This is also a crucial step in enhancing the accessibility of credit for enterprises and residents and reducing financing costs for the real economy at present," said Wang Qing.