Where the Shift Begins
To keep the banking system flush with cash, the central bank announced on August 5 that it would conduct a 500-billion-yuan outright reverse repo operation using a fixed quantity, interest rate bidding, and multiple-price method. The operation has a term of 3 months (92 days) and matures on November 5, 2026 (postponed if it falls on a holiday). Since 300 billion yuan in 3-month outright reverse repos mature in August, the new operation represents a net injection of 200 billion yuan, marking the second consecutive month of increased rollover volume, matching the scale seen in July.
This increase is not an isolated event. Based on July's operational data, the central bank has significantly ramped up medium- to long-term liquidity injections. On August 4, the central bank disclosed that in July, through coordinated use of outright reverse repos, medium-term lending facility (MLF) operations, and government bond transactions, it injected a total of 850 billion yuan in medium- to long-term liquidity into the market.
At the same time, short-term liquidity injections have also kept pace. From July 29 to 31, the central bank conducted 600-billion-yuan overnight reverse repo operations daily, and on August 3, it carried out another 300-billion-yuan overnight reverse repo operation. These four operations collectively injected 2.1 trillion yuan, effectively smoothing out funding fluctuations around the month-end period and "escorting" the interbank funding market.
"The central bank's liquidity management is shifting from 'smoothing peaks and valleys' to 'proactive increases,'" said Lou Feipeng, a researcher at Postal Savings Bank of China. Against the backdrop of an expanding fiscal policy, the central bank is proactively strengthening counter-cyclical adjustments. By preemptively replenishing liquidity, it aims to offset funding gaps from tax payments and government bond issuance, maintaining ample liquidity to support credit expansion and steady economic growth.
200 Billion Yuan Net Injection Lands
With 300 billion yuan in 3-month outright reverse repos maturing in August, the central bank's rollover operation increased the volume, resulting in a net injection of 200 billion yuan. The scale of this increase matches that of July, aligning with market expectations.
Why has the central bank increased the volume of 3-month outright reverse repo rollovers for two consecutive months? Wang Qing, chief analyst at Dongfang Jincheng, explained to reporters that after earlier moderate reductions in various central bank open market operations, major market rates broadly rebounded in June and stabilized in July. For instance, in July, both the DR001 and DR007 rates operated stably around the policy rate of 1.4%, while the one-year yield on AAA-rated commercial bank certificates of deposit remained unchanged month-over-month. This suggests that after correcting the earlier overly loose market liquidity, the room for further rate increases is limited.
"We can see that in July, the central bank resumed net injections of medium-term liquidity. The continuation of increased rollover volumes for 3-month outright reverse repos in August helps maintain ample market liquidity, prevents excessive rises in market rates, and thereby stabilizes market expectations," Wang Qing added.
Another reason is the increased supply of government bonds. Caitong Securities noted in a research report that liquidity faces two challenges in August: First, government bond supply may continue to expand, with an estimated issuance of about 2.77 trillion yuan and net financing of about 1.33 trillion yuan. Second, the scale of maturing medium- to long-term funds has risen to 1.9 trillion yuan, making the rollover of related tools a key variable affecting the funding landscape.
Perhaps for this reason, the Politburo meeting on July 30 stated that "macro policies in the second half of the year must be strengthened and made more effective, accelerating fiscal spending and the use of bond funds." Wang Qing further analyzed that this implies government bond issuance may accelerate further in August. From this perspective, the increased rollover of 3-month outright reverse repos in August supports the smooth issuance of government bonds, reflecting coordination between monetary and fiscal policies.
"The central bank's choice to increase rollover volumes is also aimed at implementing a moderately loose monetary policy, strengthening counter-cyclical adjustments, and supporting the real economy," Lou Feipeng added. This helps maintain ample liquidity in the banking system, prevents excessive tightening of the funding market, stabilizes short-term rate fluctuations, reduces financing costs for financial institutions, creates a suitable monetary environment for fiscal policy to take effect, boosts market confidence, and promotes reasonable growth in aggregate social financing.
Full Arsenal of Liquidity Management Tools Deployed
Facing different fund maturity structures and liquidity demands in August, the central bank deployed various tools to precisely hedge against gaps of different durations. Short-term gaps are smoothed using overnight reverse repos. Specifically, from July 29 to 31 and on August 3, the central bank conducted overnight reverse repo operations using a fixed rate and quantity bidding method. From July 29 to 31, daily operations of 600 billion yuan were conducted, and on August 3, a 300-billion-yuan operation was carried out. These four overnight reverse repo operations collectively injected 2.1 trillion yuan, smoothing funding disruptions around the month-end crossover and ensuring stable market operations.
The four overnight reverse repo operations around the end of July only announced the quantity, not the operation interest rate level. Wang Qing believes this shows that overnight reverse repos currently primarily serve a short-term liquidity adjustment function, not a price control function. The main policy rate remains the central bank's 7-day reverse repo rate.
For medium- to long-term gaps, the central bank uses outright reverse repos, MLF operations, and government bond transactions as follow-ups. Data released by the central bank on August 4 shows that in July, the MLF had a net injection of 100 billion yuan, the standing lending facility saw a net withdrawal of 1 billion yuan, and other structural monetary policy tools net-injected 174.4 billion yuan. In open market operations, government bond transactions net-injected 50 billion yuan, 7-day reverse repos had a net withdrawal of 249.5 billion yuan, central treasury cash management net-injected 30 billion yuan, and other-term reverse repos net-injected 700 billion yuan.
"The coordinated deployment of short-, medium-, and long-term tools aims to build a multi-tiered liquidity support system, precisely matching funding needs of different durations," Lou Feipeng analyzed one by one. Overnight reverse repos smooth short-term fluctuations like month-end and tax periods, improving liquidity management efficiency. Outright reverse repos and MLF provide medium-term funds, supporting government bond issuance and banks' corresponding credit extension. Government bond transactions serve as a long-term liquidity base. "This reflects the central bank's use of term structure matching to guide market rates to operate smoothly around the policy rate," Lou Feipeng said.
Optimizing Fiscal-Monetary Policy Coordination
The central bank's continued strengthening of monetary policy to stabilize liquidity ultimately aims to serve high-quality development of the real economy. The Politburo meeting at the end of July clearly stated the need to "comprehensively use and timely adjust monetary policy tools, and optimize the implementation of fiscal and financial coordination to promote domestic demand." Industry insiders widely believe that this means during periods of increased government bond supply pressure, the central bank will likely step up its coordination efforts.
In the view of Wen Bin, chief economist at Minsheng Bank, the establishment of a 100-billion-yuan special fund in the first half of the year for fiscal-financial coordination to promote domestic demand, combining loan interest subsidies, financing guarantees, and risk compensation, has already yielded good results. In the second half of the year, it will continue to be optimized based on previous experience, jointly guiding resources toward consumption and private investment areas.
Dong Ximiao, chief economist at Lianhe Credit Rating and executive director of the Shanghai Institute for Financial Development, further analyzed that in terms of fiscal-financial coordination to boost domestic demand, the space is mainly reflected in leveraging fiscal multiplier effects through policy-based financial instruments and government investment funds to attract social capital for major project construction. Additionally, fiscal interest subsidies can work in tandem with structural monetary policy tools to precisely support areas like equipment upgrades, consumer goods trade-ins, and technological innovation, achieving a "fiscal plus financial" linkage to promote consumption and expand investment.
Luo Zhiheng, chief economist at Yuekai Securities, believes that monetary policy should not only maintain reasonable liquidity but also strengthen coordination with fiscal interest subsidies, guarantees, and risk-sharing policies. This would push funds more effectively into consumption, equipment upgrades, technological innovation, and major projects, improving the actual effectiveness of financial support for the real economy and domestic demand expansion.
It is foreseeable that the policy approach of fiscal-financial linkage is accelerating its transformation into concrete actions. Looking ahead, Wang Qing analyzed that overall, macro policies in the second half of the year will tilt toward stabilizing growth. This will include accelerating government bond issuance and pushing the 800-billion-yuan new policy-based financial instruments into effect. At the same time, Wang Qing believes the likelihood of a reserve requirement ratio cut in the short term is small. "This means that going forward, medium-term liquidity operation tools like outright reverse repos and MLF are expected to see sustained increases in rollover volumes, supporting government bond issuance and banks' accompanying credit extension. This is a key focal point for the central bank to strengthen counter-cyclical adjustments in current monetary policy," Wang Qing said.
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