Net liquidity withdrawal of 300 billion! The central bank continues to roll over and conduct outright reverse repos with a reduced size—what is the deeper meaning behind it?

Ask AI · Why does loose market liquidity lead the central bank to perform buyback cuts?

21st Century Business Herald reporter Tang Jing

On April 3, the People’s Bank of China (PBOC) released an announcement for open market bond buyout-type reverse repo bidding, saying that to maintain ample liquidity in the banking system, on April 7, 2026, it will conduct a 800 billion yuan buyout-type reverse repo operation through fixed-amount, interest-rate bidding with a multiple-price winning scheme. The term will be 3 months (89 days), and the maturity date will be July 5, 2026 (postponed if it falls on a holiday).

The buyout-type reverse repo is an open market operation tool launched by the PBOC in October 2024. It refers to the central bank purchasing bonds from primary dealers (such as large commercial banks) and agreeing that the dealer will repurchase the same quantity of the same type of bonds in the future, thereby achieving the purpose of injecting liquidity into the market.

Wind data shows that in April, 1.1 trillion yuan of 3-month buyout-type reverse repo will mature. As a result, when the PBOC carries out an 800 billion yuan buyout-type reverse repo operation on April 7, it means that the amount of 3-month buyout-type reverse repo will be reduced for the continuation in the month, with a cut of 300 billion yuan.

Wang Qing, chief macro analyst at Orient Securities (Dongfang Jincheng), told the reporter that the continued downsizing of 3-month buyout-type reverse repo for consecutive rollovers—consistent with the recent consecutive “record-low” open market operations—mainly stems from the market’s somewhat loose liquidity since early April. From April 1 to April 3, the PBOC conducted reverse repo operations of 500 million yuan, 500 million yuan, and 1 billion yuan for a 7-day term, respectively, using fixed-rate and quantity bidding methods. In addition, in the wording for the April 2 announcement, it added the phrase “full amount met the needs of primary dealers,” reflecting that market institutions have lowered their demand for central bank funds.

Judging from the performance of the funding market, on April 3, Shibor across all tenors fell across the board. Specifically, the overnight Shibor was 1.2380%, down 3.3 basis points; the 7-day Shibor was 1.3380%, down 6.6 basis points; and the 14-day Shibor was 1.3960%, down 2.6 basis points. In addition, as of the close of that day, the DR007 volume-weighted average interest rate fell to 1.3372, slightly below the level of the policy interest rate, and the SSE 1-day treasury bond reverse repo rate (GC001) fell to 0.995%.

Wang Qing pointed out that recently, the average of DR001 has been running continuously below 1.3%. On April 2, the maturity yield of 1-year negotiable certificates of deposit of commercial banks (AAA-rated) fell below 1.5%, hitting a historical low. All of these are at a relatively clearly low level. The underlying drivers mainly include the PBOC’s large-scale net injection of 1.9 trillion yuan of medium-term liquidity through comprehensive use of MLF and buyout-type reverse repo in January and February, as well as the relatively low net financing scale of government bonds in March.

“Against this backdrop, the central bank has appropriately ‘reined in water’ in medium- and short-term liquidity management, sending a signal to guide funds to stabilize and to avoid major market interest rates deviating excessively downward away from the policy interest rate, which helps stabilize market expectations.” Wang Qing further noted that this does not mean the central bank will continue to tighten medium- and long-term liquidity; once major market interest rates rise back to around the level of the policy interest rate, buyout-type reverse repo is expected to resume net injections.

Other industry experts also told the reporter that when observing liquidity conditions, it is not advisable to focus only on changes in any single influencing factor. Instead, one should comprehensively combine the effects of various factors on the “quantity.” From this perspective, compared with changes in quantity, changes in the “price”—that is, the short-end interest rate level—are more appropriate.

The experts also mentioned that at the news briefing in January this year, PBOC Vice Governor Zou Lan had already clearly stated that the goal of open market operations is to guide overnight rates to run around the level of the policy interest rate. The recent consecutive low-volume open market operations precisely reflect that the PBOC’s operations are becoming more flexible and more precise, and they are also the proper implication of the monetary policy shift to price-based regulation.

Wang Qing expects that over the full year, the central bank will comprehensively use medium- to long-term liquidity management tools such as the reserve requirement ratio for deposits, buying and selling of government bonds, MLF, and buyout-type reverse repo to keep the funding market in a state of relatively stable and ample liquidity. On the one hand, this can ensure the issuance of government bonds; on the other hand, it releases a signal that the quantity-based monetary policy tools will continue to intensify their efforts.

However, Wang Qing also cautioned that since the end of February, changes in the Middle East situation have pushed international oil prices sharply higher, while in March China’s overall price level showed a strong upward trend. This will also create some disruption to the momentum of economic growth. In the short term, amid a sudden rise in external uncertainty, while maintaining ample market liquidity, China’s monetary policy will also, in stages, tilt toward stabilizing prices. The timing of any reserve requirement cuts may be delayed; later, if external shocks increasingly disrupt domestic economic growth, monetary policy will correspondingly increase the degree of appropriate easing.