PBOC injects 348 billion yuan as overnight repo debuts mid-month

The People's Bank of China deployed its overnight reverse repo tool for the first time mid-month, injecting 348 billion yuan net into the banking system as it shifts from net withdrawal to net injection.

The People's Bank of China injected 348 billion yuan net Friday, deploying its overnight reverse repo tool for the first time mid-month to smooth tax-period funding demand.

"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, head of foreign exchange and rates strategy at Oversea-Chinese Banking Corp. "The stance towards liquidity management appears unchanged, in that the PBoC aims to smooth liquidity but not overflood the market."

The central bank conducted 349 billion yuan of overnight reverse repos and 1 trillion yuan of six-month outright reverse repos on Friday, the latter an equal-value rollover of maturing contracts. The 10-year government bond yield fell one basis point to 1.68 percent, the lowest since July 2025.

The operations mark a clear shift from the second quarter, when the PBoC withdrew more than 1.35 trillion yuan net between March and May to guide liquidity from overly loose to reasonably ample. With the overnight tool now deployed more frequently and the seven-day reverse repo rate held at 1.40 percent, the central bank is fine-tuning short-term conditions while keeping the policy stance accommodative.

From 1.35 Trillion Yuan Withdrawal to Net Injection

Since July, the PBoC has pivoted from the second quarter's net withdrawal stance. The central bank conducted 500 billion yuan of three-month outright reverse repos on Aug. 5, a net injection of 200 billion yuan after offsetting 300 billion yuan of maturing contracts. It has also paused seven-day reverse repo operations for four consecutive working days, relying instead on the newer overnight tool.

The overnight reverse repo, introduced after Governor Pan Gongsheng announced at the June Lujiazui Forum that the central bank would expand its short-term liquidity toolkit, carries a rate of 1.25 percent, below the seven-day rate of 1.40 percent. The tool was previously deployed near the end of June and July, including a 600 billion yuan operation on July 29 alongside 206.5 billion yuan of seven-day repos. The seven-day rate itself has declined from an average near 1.80 percent during 2022-2024 operations, a 40-basis-point easing that reflects the central bank's broader push to lower borrowing costs.

Rate Corridor Narrows to 50 Basis Points

The Q2 monetary policy report shows social financing grew 7.4 percent year-on-year and M2 expanded 8.0 percent at end-June, with the overnight interbank rate DR001 averaging 1.31 percent in the first six months. The PBoC also cut structural monetary policy tool rates by 0.25 percentage points in Q2, narrowed the temporary reverse repo corridor from 70 basis points to 50 basis points, and created a 1 trillion yuan private enterprise relending facility.

The last time the PBoC shifted its liquidity stance this decisively was in early 2024, when it moved from net injection to a more measured approach as the economy stabilized. The current pivot toward net injection, combined with the expanded use of the overnight tool, suggests the central bank is prioritizing liquidity adequacy to support government bond issuance and smooth tax-period volatility through the remainder of the year.

For global investors, the shift matters because it keeps Chinese bond yields low — the 10-year yield at 1.68 percent is near multi-year lows — while supporting credit conditions for the real economy. The key indicator to watch is whether the PBoC continues deploying the overnight tool at month-end and during future tax periods, which would confirm the tool's normalization as part of the standard liquidity toolkit.

This article is for informational purposes only and does not constitute investment advice.