What signals are conveyed by the central bank's "extremely low" reverse repurchase operations?

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■ Liu Qi

Since April, the People’s Bank of China has continuously carried out “ultra-low-volume” 7-day reverse repo operations. Among them, on April 1 and April 2, the operation size was both 500 million yuan, which is the lowest operation volume since the PBOC established the routine mechanism for daily open market operations in February 2016—this has drawn widespread attention in the market.

In my view, the PBOC’s consecutive “ultra-low-volume” reverse repo operations are a routine adjustment under conditions of ample liquidity. They also directly reflect China’s monetary policy control framework shifting from a quantity-based approach to a price-based one, making policy adjustment more flexible and targeted. This is of great significance for maintaining stable operation of financial markets.

Behind the “ultra-low-volume” reverse repo operations is ample liquidity in the banking system. March is a quarter-end month, when fiscal spending is relatively strong. At the same time, the PBOC has also maintained strong support for liquidity. From the beginning of the year to the end of March, the PBOC has accumulated net injections of more than 1.65 trillion yuan of medium- to long-term funds through MLF (Medium-Term Lending Facility) and buyout-style reverse repos, creating favorable monetary and financial conditions for the market.

As the “barometer” of liquidity, market interest rates more directly validate the prevailing trend of looser funding conditions. In March, the DR001 (the overnight pledged repo weighted average interest rate in the interbank market) average was about 1.31%, staying at a low level. After entering April, DR001 has continued to run below 1.3%, clearly indicating that short-term funding demand from financial institutions has declined and that the market is not “short of money.” Therefore, the PBOC’s decision to reduce short-term funding injections accordingly is a precise response to the market’s supply-and-demand relationship, not an intentional tightening of liquidity.

Correspondingly, the market should not simply judge whether monetary policy has turned by looking at changes in open market operations—especially the quantity change of a single open market operation. Open market operations are one of the PBOC’s ways to inject liquidity. Their scale is not only influenced by the policy stance, but also disrupted by seasonal factors such as residents paying taxes and cash withdrawals on holidays. Therefore, judging the policy orientation only by operation size may inevitably be incomplete.

In recent years, China has been moving toward a price-based monetary policy control framework. The PBOC is gradually de-emphasizing quantity-based targets and placing greater focus on leveraging price-based adjustments. Open market operation volumes are increasingly meant to serve the goal of interest rate control. As the Deputy Governor of the People’s Bank of China, Zou Lan, said at a press conference held by the State Council Information Office in January this year: “Flexibly combine various tools of open market operations to maintain ample liquidity and guide overnight interest rates to operate around the level of policy interest rates.” The recent “ultra-low-volume” open market operations are precisely a reflection of the PBOC operating with greater flexibility and accuracy—both avoiding liquidity buildup and ensuring stable operation of the money market. They are also an inherent requirement for the shift to price-based monetary policy control.

From the policy stance, the current moderately accommodative monetary policy has not changed. Looking ahead, the PBOC will continue to reasonably arrange tool types based on liquidity and market operation conditions, do a good job in liquidity management, and support the stable and healthy development of financial markets.

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Responsible editor: Gao Jia