Open Market Operations Continue to Absorb Excess Liquidity, What's Happening in the Interbank Market?

Since August, open market operations have continued to point towards absorbing excess liquidity.

On August 12, open market operations conducted a reverse repurchase agreement of RMB 1.146 trillion, with a net absorption of RMB 461 billion. According to statistics from The Daily Economic News, last week saw a net absorption of RMB 5,365 billion, while this week saw a net absorption of RMB 9,001 billion, totaling over RMB 10 million.

Notably, despite the continuous absorption of excess liquidity, money market funds have maintained their low levels and stabilized.

As of August 12, the interbank market's DR007 had a daily weighted average of 1.4660%, with a 10-day weighted average of 1.4784%, indicating that the interbank market's money market funds have been trending downward.

Looking at both open market operations and interbank market funds, it appears to be a contradictory phenomenon - open market operations continue to absorb excess liquidity, while interbank market funds trend towards lower levels.

According to Zhang Xiu, chief analyst of fixed-income products at Goldwind Securities, the continuous decrease in interest rates is not a temporary factor, but rather reflects the consistent expectations of primary dealers regarding future interest rates and even partially reflects the attitudes of monetary authorities towards liquidity management.

Over 20 trillion yuan has been absorbed by open market operations since August

The interbank market's DR001 also showed a downward trend. As of August 12, the daily weighted average was 1.2880%, with a 10-day weighted average of 1.2930%, down by 0.5 basis points.

Despite the open market operation on August 8 that conducted a RMB 7 trillion reverse repurchase agreement, the actual net absorption was RMB 2 trillion due to the corresponding reverse repurchase agreements worth RMB 9 trillion.

According to preliminary statistics, as of August 12, open market operations had absorbed over RMB 262.65 billion since August, while interbank market funds continued to stabilize.

Zhang Xiu noted that many investors have taken notice of the abundant liquidity in the banking system since early August. In the six trading days from August 1 to August 8, DR007's daily weighted average was 1.44%, down by 11.9 basis points and 3.6 basis points compared to the preceding six-trading-day period in June and July.

Zhang Xiu continued that even before early August, the marginal changes in funds had already become apparent. For example, from July's last ten trading days, DR007's daily weighted average was 1.54%, down by 6.9 basis points and 8.6 basis points compared to May and June's preceding ten-trading-day periods.

The meeting on August 1 proposed that the central bank comprehensively utilize various monetary policy tools to maintain liquidity, guide financial institutions to maintain reasonable credit growth, and make social financing scale and money supply grow in line with economic growth and price level expectations.

Zhang Xiu noted that the attitudes of monetary authorities can be seen from long-term products. On one hand, the 3M AAA-rated CD interest rate has been stable around 1.55% since early July, significantly lower than June's average of 1.63%. On the other hand, despite the abundant liquidity on August 7 (with a 3M AAA-rated CD interest rate of 1.54%), the People's Bank still announced that it would conduct a RMB 7 trillion reverse repurchase agreement the next day to further increase banking system liquidity.

The central bank has implemented large-scale net absorption

Open market operations have continued to absorb excess liquidity, with interest rates stabilizing downward. Zhang Xiu noted that investors should pay attention to the 7-day open market operation interest rate at any time, as it is the main policy interest rate and a major channel for transmitting monetary policy signals.

Zhang Xiu warned that relying solely on open market operation quantities and net injection amounts may lead to biased conclusions and even contradict facts.

One reason is that the banking system's liquidity is affected by a variety of factors, including monetary policy operations, cash injections or absorption, fiscal revenues and expenditures, foreign exchange flows, reserve requirement ratios, and market participants' willingness to hold funds. Open market operations are just one factor among many, and judging monetary policy orientation solely based on open market operation quantities is not comprehensive enough.

Another reason is that open market operations have an important function in "regulating the peak" and "filling the valley". For example, when liquidity peaks appear, open market operations will reduce injection amounts to "regulate the peak"; when valleys appear, open market operations will tend towards net absorption to "fill the valley".

Since open market operations do not necessarily completely flatten peaks or fill valleys, there may be a situation where "excess liquidity is abundant during net absorption, and liquidity tightens during net injection". If investors rely solely on operation quantities and corresponding net injection amounts to make inferences at this time, the results will contradict facts.

From the interbank market perspective, the large-scale net absorption or abundance of funds is one of the direct factors. The analysis team at Western Securities noted that the initial intention to increase funds continued to rise in early August, with the amount of funds injected by major banks reaching RMB 50 billion. From August 4 to August 8, the daily average net injection scale was RMB 43.9 billion, up from the previous week's RMB 37.1 billion.

On August 12, the interbank market showed a balanced but slightly loose situation, with a daily trading volume of RMB 885.54 billion, up 1.2% from the previous day. DR001 weighted at 1.32%, basically unchanged from the previous day; DR007 weighted at 1.44%, basically unchanged.

On this day, bond market trading volumes increased, with the coupon market trading volume reaching RMB 159 million, up 5.29%. The yields on 10-year government bonds and corporate bonds were 1.727% and 1.838%, respectively, up by 0.95 basis points and 1.6 basis points.

The bond lending market traded RMB 28.12 billion, up 1.76%.