Financial institutions' funding demand declines, and the central bank continues to implement "massive" liquidity injections

500M yuan, 500M yuan, 1B yuan, 500M yuan—entering April, the 7-day reverse repo operations have been carried out at “low volume” for many days. Among them, the 500M yuan operation size is the lowest level since 2015. In addition, since March, the buyout-style reverse repo has also seen its operation volumes repeatedly reduced before being continued.

The changes in these short-term and mid-term liquidity management tools have drawn market attention to the central bank’s stance on liquidity regulation. Industry experts believe this is merely a flexible adjustment made by the central bank in consideration of changes in market funding supply and demand, and is not a tightening of monetary policy. At present, market liquidity remains ample.

Operation volumes fully meet the needs of primary dealers

On April 7, the People’s Bank of China (PBOC) carried out a 7-day reverse repo operation of 500M yuan, continuing the “low-volume” approach. On the same day, the PBOC carried out a buyout-style reverse repo operation with a 3-month tenor of 800 billion yuan. As April has a maturing scale of 1.1 trillion yuan, this operation is a volume-reduced continuation, resulting in a net drain of 300 billion yuan.

Regarding short-term liquidity management tools, Wang Qing, Chief Macro Analyst at Orient Securities, believes that the “low-volume” operation in the 7-day reverse repo is directly due to funding conditions being “steadily and mildly loose.” It also aims to guide market interest rates to avoid excessive downside.

In the view of industry experts, the PBOC recently added the wording “fully met the needs of primary dealers” in its announcements for 7-day reverse repo operations, reflecting the main reason behind the “low-volume” operations: the decline in financial institutions’ demand for liquidity from the central bank. The current operation volume of the 7-day reverse repo is already sufficient to meet primary dealers’ short-term funding needs.

A reporter from Shanghai Securities News learned from some financial institutions that after the Spring Festival, residents’ cash returned to banks; coupled with centralized fiscal spending toward the end of the quarter, since April, financial institutions have generally had abundant funds, and most have not submitted funding demand to the central bank.

For mid-term liquidity management tools, Dong Shimiao, Chief Economist at Zhaolian, believes that tool operations show the features of “net liquidity drainage at the aggregate level, with differentiation in structure.” Among them, the buyout-style reverse repo has continued to run at reduced volumes, while the Medium-Term Lending Facility (MLF) has continued with increased volume—In March, the buyout-style reverse repo recorded a total net drain of 300 billion yuan, the first net drain since June 2025. The MLF, meanwhile, achieved net lending of 50 billion yuan, continuing with increased volume for the 13th consecutive month.

“With the buyout-style reverse repo continuing to reduce volumes, the main reason is that financial institutions’ demand for funds from the central bank has declined, rather than the central bank proactively tightening.” Dong Shimiao said. The key basis is that key market interest rates are at historical lows.

The necessity to further boost liquidity supply is not strong

In early April, funding rates clearly moved down. Market data shows that the overnight anonymous rate fell as low as 1.2% at one point, setting a new intra-year low, and drove DR001 to move down in sync. R007 briefly fell below the level of policy rates. Several funding market traders told Shanghai Securities News that repo rates and Shibor both declined significantly, leading to a further drop in the yields of short-term assets represented by negotiable certificates of deposit, and causing the overall funding price midpoint to shift downward.

“Moving into April, funding conditions are quite loose, so the necessity for the central bank to further boost liquidity supply is not strong.” Ming Ming, Chief Economist at CITIC Securities, said.

Industry participants generally believe that recent changes in the daily operation volumes of the central bank are more of a flexible adjustment to the liquidity environment and market institutions’ demand, and do not indicate a change in the direction of monetary policy.

Funding conditions are expected to remain loose

Looking ahead to April, market overall judgment on funding conditions is relatively optimistic. “At the end of the first quarter, banks’ excess reserves were clearly on the high side, and this portion of funds will naturally carry over into April.” A trader at a rural commercial bank in South China said. Although April still faces conventional fiscal factors such as net issuance of government bonds of around 1 trillion yuan and tax payment-related fund remittances of about 1.8 trillion yuan, the overall impact is controllable. Based on historical experience, April to May is typically one of the periods with the loosest funding conditions in the year.

Traders generally expect that overnight rates will still fluctuate around policy rates, but with ample liquidity, there remains room for the overall midpoint to move lower. In April, the R001 midpoint may fall to around 1.35%, below the level at the end of last year. DR007 is also expected to move further toward the interest rate on demand deposits of 1.4%, and may even temporarily touch the recent low levels in recent years.

Some market participants have also pointed out that external inflation shocks are the main risk to funding conditions in April. “There is indeed imported inflation pressure. Although current oil prices have caused some disturbance, it may not necessarily evolve into broad-based inflation.” Dong Shimiao judged that the central bank will likely continue its policy focus of “putting me first,” and liquidity operations in the next phase will not shift toward tightening. If external shocks intensify in the future, it is more likely to support the development of green energy through structural tools and ease energy gaps, rather than respond to inflation with liquidity tightening.