In an endeavor to maintain ample liquidity in the banking system, the People's Bank of China (PBOC) executed a reverse repurchase operation amounting to 318.5 billion yuan for a seven-day term on February 25th, utilizing a fixed rate mechanism for its bidding process. The bid rate was held steady at 1.5%, consistent with preceding rates. On the same day, an additional 300 billion yuan was made available through a medium-term lending facility (MLF), with a one-year tenure. The bidding rates varied, having a ceiling at 2.2% and a floor at 1.8%, resulting in a final rate of 2%. Post operation, the total MLF balance surged to 4.094 trillion yuan.

Analysts noted that the expiration of MLF in February was projected to reach 500 billion yuan, thus the renewal of 300 billion yuan on February 25 represents a reduction of 200 billion yuan in MLF liquidity for the month. Chief Macro Analyst Wang Qing from Dongfang Jincheng highlighted that the PBOC had already conducted a substantial operation in January, releasing 1.7 trillion yuan in a reverse repo to preemptively address the sizeable MLF maturity in February. This suggests a commitment to maintaining liquidity despite the slow reduction in MLF operations since October 2024.

Furthermore, Wen Bin, Chief Economist at Minsheng Bank, pointed out that the PBOC has augmented its toolbox with various instruments. Despite the ongoing shrinkage of MLF, since the fourth quarter of the previous year, the central bank utilized bond trading and reverse repos to inject medium to long-term funds, ensuring liquidity remains abundant. In fact, data suggests that between October 2024 and January 2025, the PBOC injected staggering amounts through reverse repos, totaling 4.4 trillion yuan, while also conducting a combined 1 trillion yuan in bond purchases from August to December 2024.

The introduction of the buyout-type reverse repurchase agreement in October 2024 marks a pivotal development in the PBOC's approach. This mechanism allows the central bank to purchase securities from primary dealers, setting a period for the dealers to repurchase those securities. Through this arrangement, the rights to securities are effectively “bought out,” allowing for the transfer of collateral while enhancing liquidity and security within the interbank market and supporting its international standards.

Under the new monetary policy framework, the PBOC is progressively refining its monetary toolbox, both in terms of types and maturity structures of the instruments available. Recently released reports have emphasized the importance of implementing a prudently relaxed monetary stance, suggesting that policymakers should tactically optimize policy intensity and timing based on domestic and international economic fluctuations, as well as overall market conditions. Wen Bin asserted that since 2025, amidst rising external uncertainties and constrained internal policy effectiveness, there exists a stronger emphasis on a “dynamic and adjustable” approach within monetary regulation—striking a balance between various objectives such as economic growth, inflation stabilization, exchange rate stability, and financial security.

Experts anticipate that despite the recent halt of secondary market treasury purchases by the central bank, there will likely be a consistent reliance on large-scale buyout-type reverse repos to uphold medium-term market liquidity at a relatively reasonable level. This strategy aims to bolster credit extension from banks at the beginning of the year, support government bond issuance, and stabilize market expectations.