5 billion yuan reverse repurchase hits a 10-year low; liquidity is expected to remain relatively loose in April

Source: Shanghai Securities News | Author: Zhang Xinran

Although the People’s Bank of China’s open market operations have been somewhat tightened since March, interbank market liquidity has not shown any obvious tightening. Near the cross-month and cross-quarter time points, funding rates overall have remained at low levels, and liquidity has continued to follow a stable pattern.

On the first trading day of April, the market drew attention due to the PBOC’s “lowest-volume” operation: the PBOC announced on April 1 that it conducted a 500M yuan, 7-day reverse repo operation, with a winning interest rate of 1.4%. With 78.5B yuan of reverse repos maturing on the same day, the PBOC achieved a net withdrawal of 78B yuan.

The reverse repo operation size was the lowest level since 2015. Analysts believe that against the backdrop of relatively loose funding conditions, this signals that the PBOC intends to deliberately guide a smooth and somewhat tightening stance, keeping rates operating within a reasonable range. Overall, the liquidity environment will likely remain ample, but there is limited room for rates to fall sharply further.

March funding conditions remained steady amid reduced-volume injections

Looking back at March, the PBOC’s operation pace clearly shifted toward balance, but market liquidity did not come under pressure as a result.

In terms of operations: for buyout-style reverse repos, the volume shrank for the first time in about 9 months, following a return to continuation of operations; net withdrawals were about 300 billion yuan. Reverse repos were mainly conducted through regular operations, with only a modest increase around the cross-quarter point. The Medium-Term Lending Facility (MLF) saw a small net injection of 50 billion yuan. Overall, open market operations in March showed characteristics of marginal convergence.

However, the performance of funding prices remained stable: the overnight repo rate (R001) generally hovered around 1.39% with narrow fluctuations, and the tax-period stage also did not show any obvious rise. The 7-day repo rate (R007) basically stayed near 1.50%, only briefly rising to 1.52% at the start of the cross-quarter period, and then quickly falling back; the fluctuation range was notably smaller than during the same period in past years.

Zhao Zenghui, Chief Fixed-Income Analyst at Changjiang Securities, told a reporter from Shanghai Securities News: from March 23 to 27, the PBOC achieved a net injection of 231.9 billion yuan through 7-day reverse repo operations, and at the tax-period stage maintained an appropriate level of offsetting. Major funding rates such as DR001, R001, DR007, and R007 all fluctuated within relatively limited ranges, indicating that overall market supply and demand for funds remained fairly balanced.

Institutions generally believe that in March, despite the PBOC reducing the scale of injections, funding conditions remained resilient, closely related to the “stock support” formed by earlier large-scale injections.

Wang Qing, Chief Macro Analyst at Oriental Gorneng, told a reporter that from January to February the PBOC cumulatively net injected about 1.9 trillion yuan of medium- to long-term liquidity through the MLF and buyout-style reverse repos. In addition, the scale of net government bond financing in March was relatively low, keeping liquidity in the banking system generally ample. At the same time, around month-end and quarter-end, the PBOC effectively smoothed funding market volatility by increasing short-term reverse repo injections.

“Lowest-volume” operations send a signal of looser April liquidity

Entering April, the PBOC reinforced market expectations of liquidity staying steady but slightly loose through “lowest-volume” reverse repo operations.

Wang Qing said the April 1 reverse repo operation of 0.5 billion yuan was the smallest scale since 2015. The direct reason is that funding conditions are already in a steady-to-loose state. This also reflects the policy intention to prevent market rates from falling too much.

From a seasonal pattern perspective, April’s funding rates typically fall more than in March. Institutional calculations show that over the past five years, the R001 and R007 midpoints in April declined by about 15 basis points and 20 basis points, respectively, compared with the March averages. However, because funding rates in March this year are already at a low level, the market generally expects the decline in April rates may be less than the historical average.

From the perspective of supporting factors: at the end of the quarter, government fiscal spending forms a cash inflow at the beginning of the month, supplementing bank liabilities; April is typically a government bond issuance off-season, so its crowding-out effect on liquidity is relatively limited. People from Huaxi Securities expect that the scale of net government bond financing in April may be between 0.93 trillion yuan and 1.03 trillion yuan, so the marginal impact on funding conditions should be broadly controllable.

Tan Yiming, Chief Fixed-Income Analyst at Tiansfeng Securities, said that in April the funding rate midpoint usually stays at a relatively low level for the year. Credit disbursement at the start of the quarter has relatively limited impact on liquidity crowding-out, and since the PBOC’s protective intention is still in place, the overall liquidity environment is expected to remain stable.

However, institutions generally believe that April is a traditional major tax period, and liquidity frictions from tax-related fund flows are usually stronger than in March. Meanwhile, the maturity volume of medium- to long-term funding in April is also higher than in March. Huaxi Securities’ calculations show that the total maturing volume in April—such as buyout-style reverse repos and MLF medium- to long-term instruments with 3-month and 6-month terms—adds up to about 2.3 trillion yuan, higher than March’s 2.05 trillion yuan. Against the backdrop that the balance of medium- to long-term funds is still at a historically high level, it is not ruled out that the PBOC will continue with reduced-volume rollovers to withdraw part of the redundant liquidity.

Zhao Zenghui also said that after the end of the cross-quarter period, at the beginning of April the funding market is likely to loosen on the margin, but in the middle and later period it is still necessary to focus on factors such as pressure from tax periods, the rollout schedule of new policy-based financial instruments, and how bank interbank deposits are absorbed. If those factors coincide, funding rates may still rise somewhat in the middle-to-late month and again near month-end.

(Editor: Wen Jing)

Key words:

                                                            Reverse repo