(Aug 14): China’s central bank injected liquidity through overnight reverse repos on Friday, marking its first such operation in the middle of a month in a boost to bond bulls.
The People’s Bank of China (PBOC) conducted 349 billion yuan (US$51.7 billion or RM211.5 billion) of overnight reverse repos, it said in a statement. Taking into account the one billion yuan maturity in the seven-day contracts, the operation resulted in a net injection of 348 billion yuan into the banking system — the first such addition this month.
Following the move, China’s 10-year government bond yield fell one basis point to 1.68%, its lowest level since July 2025. Strong investor demand carried over into a sovereign debt sale on Friday, pushing 10-year auction yields to the lowest in over a year.
The overnight tenor was previously deployed near the end of June and July, following PBOC governor Pan Gongsheng’s announcement at the Lujiazui Forum in June that the central bank would expand its short-term liquidity toolkit.
The central bank’s increased use of the tool underscores its efforts to fine-tune short-term liquidity conditions while reassuring investors of ample liquidity for mid-month tax payments. The move is also reviving sentiment in the bond market after the rally hit a snag earlier this week when the PBOC skipped open market operations.
Analysts view the injection as a tactical adjustment rather than a policy shift.
“The amount is not seen as particularly big given zero operation in seven-day reverse repos over past days, while there is liquidity demand for tax payment,” said Frances Cheung, the head of foreign exchange and rates strategy at Oversea-Chinese Banking Corp (OCBC). “The stance toward liquidity management appears unchanged, in that the PBOC aims to smooth liquidity but not overflood the market.”
Ample liquidity has buoyed a recent bond rally amid weaker-than-expected inflation and a factory activity slump. Attention is now turning to Monday’s July activity data for fresh clues on the economy.
Beyond short-term operations, the central bank is also addressing broader liquidity needs. The central bank is set to conduct 1 trillion yuan of six-month outright reverse repos on Friday, it said in a statement on Thursday. The operation will fully offset an equal amount of maturing contracts this week.
“The overnight reverse repo operation should indicate the flexibility and precision with which the PBOC conducts liquidity management, so as to meet seasonal short-term liquidity demand while also avoiding excess liquidity in the market thereafter,” said Jeffrey Zhang, a strategist at Credit Agricole CIB.
“The better-anchored market repo rates, with likely lessened volatility of overnight funding costs ahead, could lift conviction in carry trades in the near term,” he said.
Uploaded by Tham Yek Lee