To ensure sufficient liquidity in the banking system, the People’s Bank of China (PBOC) recently announced that in May, it carried out an outright reverse repo operation worth 700 billion yuan through a fixed quantity, rate bidding, and multiple winning rates mechanism. The operation consisted of 400 billion yuan for a 3 – month (91 – day) term and 300 billion yuan for a 6 – month (182 – day) term. With 900 billion yuan of 3 – month outright reverse repos maturing in May, the outright reverse repos resulted in a net withdrawal of 200 billion yuan from the market.
Despite the continued net withdrawal trend from the previous month, experts noted that this does not imply the central bank is tightening market liquidity. Instead, it is offsetting the pressure from maturing operations and avoiding excessive liquidity injection. Currently, the PBOC has a diverse range of channels for base money supply. The Medium – term Lending Facility (MLF), outright reverse repo operations, and various structural tools can all be used to inject medium – term liquidity.
Recent Strengthened Counter – cyclical Adjustments
The central bank has taken successive actions recently to enhance counter – cyclical adjustments and safeguard fund liquidity. On May 15th, the first reserve requirement ratio cut of 2025 was implemented, injecting around 1 trillion yuan of liquidity into the financial market. Then, on May 23rd, the PBOC conducted a 500 billion yuan medium – term lending facility (MLF) operation, which was an increased renewal. “This marks the third consecutive month that the PBOC has increased the renewal of maturing MLF and the second consecutive month of large – scale increased renewal,” said Wang Qing, the chief macro analyst at Oriental Yicong.
According to Ming Ming, the chief economist of CITIC Securities, the May MLF operation combined with the reserve requirement ratio cut has already provided a substantial amount of liquidity. The reduced volume of the outright repo operation for renewal in May can meet the structural adjustment of commercial banks’ demand for central bank financing tools.
Overview of Recent Outright Reverse Repo Operations
As per the central bank’s announcement, from October 2024 to May 2025, the PBOC conducted a total of 8 outright reverse repo operations, with the amounts being 500 billion yuan, 800 billion yuan, 1,400 billion yuan, 1,700 billion yuan, 1,400 billion yuan, 800 billion yuan, 1,200 billion yuan, and 700 billion yuan respectively.
Open Market Treasury Bond Trading Situation
The central bank also announced that it did not conduct open market treasury bond trading operations in May. Some market institutions anticipate that the PBOC may resume open market treasury bond purchase operations in the third quarter to better utilize the treasury bond yield as a pricing benchmark. Since the central bank announced the temporary suspension of open market treasury bond purchases in January, there have been no treasury bond trading operations for five consecutive months.
In the recently released first – quarter monetary policy implementation report, the PBOC stated that it will continue to monitor and evaluate the bond market’s operation from a macroprudential perspective, pay attention to changes in treasury bond yields, and resume operations at an appropriate time based on market supply and demand conditions.
Sun Binbin, the director of the research institute of Caitong Securities, believes that resuming treasury bond purchases is urgent to increase the central bank’s holding ratio of government bonds. To achieve the goal of accelerating the construction of a financial power, it is necessary to establish a sovereign credit model for currency issuance, and treasury bonds will eventually become the main channel for the central bank to issue base money. He predicts that the PBOC is likely to resume treasury bond purchases in July or August, when the net financing of government bonds is still at a peak.
Future Outlook on Liquidity
Looking ahead, industry insiders believe that overall, liquidity will not be a concern in June.
Ming Ming stated that, considering the local government bond issuance plan, historical patterns of treasury bond issuance, and the fiscal revenue and expenditure situation, it is entirely possible to exclude the factors of MLF and reverse repo maturities, and there is basically no liquidity gap in June. However, he also pointed out that since fiscal spending usually occurs at the end of the month, there is still a possibility of fluctuations in money supply within the month. In addition, the deposit rate cut may further exacerbate the “deposit migration.” Currently, no obvious impact has been observed on the scale of bank lending, but it is still necessary to monitor whether the issuance price of certificates of deposit continues to rise and how the central bank supports liquidity and with what intensity.
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