The central bank unveiled two liquidity tools on the same day, clearly signaling its dual commitment to managing both short- and long-term funding conditions. On September 23, the People's Bank of China (PBOC) announced that, to better align with the short-term liquidity needs of the banking system, it would conduct overnight reverse repo operations from September 28 to October 8, using a fixed rate and quantity-based bidding, with a maximum daily operation size of 1 trillion yuan. Additionally, on September 24, the PBOC carried out an 800 billion yuan Medium-term Lending Facility (MLF) operation with a one-year tenor, employing fixed quantity, rate-based bidding with multiple-price allocation to maintain ample liquidity in the banking system.
Ming Ming, Chief Economist at CITIC Securities, noted that overall, the spread between overnight funds and the 7-day reverse repo rate has remained relatively stable recently. He believes this overnight reverse repo operation reflects a neutral-easing stance toward short-end liquidity, while the return to net MLF injection signals an intensified effort to support long-end liquidity.
Overnight Reverse Repo Cap Raised
The daily cap for overnight reverse repo operations has been lifted from 600 billion yuan in the previous three rounds to 1 trillion yuan, marking the most notable change in this operation. Around the National Day holiday, demand for overnight reverse repos typically rises due to factors such as residents withdrawing cash before the holiday, month-end bank assessments, and concentrated maturities of open market operations. Wang Qing, Chief Macro Analyst at Dongfang Jincheng, believes that raising the daily operation cap can fully meet financial institutions' short-term funding needs, guide the short-end money market rate DR001 to fluctuate smoothly around the policy rate, and more effectively control its volatility.
Previously, the central bank often used 14-day reverse repos to inject cross-holiday funds to address holiday liquidity pressures. However, since the end of June this year, overnight reverse repos have gradually become more routine, and the central bank's choice to use overnight reverse repo injections throughout the National Day holiday reflects a shift in liquidity management strategy. Ming Ming believes this move serves two purposes: on one hand, it supports the interbank liquidity market amid rising seasonal cash pressures; on the other, it enables more refined liquidity management through overnight reverse repos, which to some extent mitigates the impact of accumulated maturities of longer-term reverse repos on post-holiday liquidity.
Looking ahead, Wang Qing expects the central bank may further increase the frequency of overnight reverse repo operations, gradually replacing the 7-day reverse repo as the core policy tool for short-term liquidity adjustment.
MLF Returns to Net Injection
Complementing the short-end tools, September's MLF operation resulted in a net injection of 200 billion yuan, ending the brief net withdrawal seen in August. Combined with the equal-volume rollover of 3-month and 6-month outright reverse repos this month, the central bank's total medium-term liquidity net injection in September reached 200 billion yuan, marking the third consecutive month of net medium-term injections, with the scale increasing by 100 billion yuan compared to August.
Wang Qing believes the increased MLF continuation in September aligns with market expectations, likely driven by two factors. First, recent government bond issuance has accelerated, with net financing scale rising significantly, and this trend is expected to continue at elevated levels; the central bank's injection of medium-term liquidity through MLF helps support smooth government bond issuance, reflecting coordination between monetary and fiscal policies. Second, with short-end money market rates like DR001 generally trading around the policy rate, the larger MLF continuation in September and sustained net medium-term liquidity injections help maintain ample funding conditions and stabilize market expectations.
Given that September is traditionally a month for significant liquidity injections, and with one-year negotiable CD pricing rising slightly, Ming Ming analyzed that the MLF return to net injection is expected to somewhat reshape the short-end liquidity landscape.
Wang Qing predicts that macro policies will increasingly tilt toward growth stabilization, including accelerating government bond issuance and speeding up the implementation of the 800 billion yuan new policy-oriented financial instruments, all of which require central bank liquidity support. This implies that in the near term, medium-term liquidity tools, including MLF and outright reverse repos, are likely to see continued increased continuation to support government bond issuance and banks' accompanying credit deployment. This represents a key focal point in the current monetary policy push to strengthen counter-cyclical adjustment.