Summary of Key Points
In June, the central bank adjusted its tools for liquidity injection: The net purchase and sale of government bonds in the open market amounted to only 10 billion yuan (a reduction of 40 billion yuan from May's 50 billion yuan, the lowest level since the restart of this operation in October 2025). However, by using other tools such as Medium-Term Lending Facilities (MLF) for a net injection of 200 billion yuan, 7-day reverse repurchase operations for 5826 billion yuan, and the creation of overnight reverse repurchase facilities, it managed to maintain sufficient market liquidity. The main reason for reducing government bond purchases was changes in macroeconomic fundamentals (weakening inflation and declining bond market yields). The policy intent was to prevent market interest rates from deviating too much from the policy rate and to avoid the situation where funds circulate idly without reaching businesses and individuals. Overall, the tone of monetary policy remained supportive but more targeted.
Detailed Analysis
1. Reduction in Government Bond Purchases by 40 Billion Yuan: A Signal of Weakening Inflation and Bond Market Conditions
Why did the central bank suddenly buy fewer government bonds? The key lies in two factors:
- Weaker inflationary pressures: The easing of tensions in the Middle East led to a significant drop in international oil prices, reducing the expectation of rising domestic prices. There was no need to stimulate the economy by purchasing large amounts of government bonds to inject liquidity.
- Excessively loose bond market conditions: Economic data in the second quarter were volatile, and there was an abundance of funds in the market, causing the yield on 10-year government bonds (which can be considered the "interest rate" on these bonds) to drop to 1.73%, down 0.02 percentage points from May. If the central bank continued to buy a large amount of government bonds, it would have pushed yields even lower, making market interest rates much lower than the policy rate set by the central bank. This could have led to funds circulating idly among financial institutions (for example, buying bonds at low costs for arbitrage purposes) rather than flowing into businesses and individuals. Therefore, the central bank chose to reduce government bond purchases to cool down the market.
2. Other Tools to Fill the Gap: Medium-Term, Short-Term, and Overnight Facilities to Maintain Liquidity
Although government bond purchases were reduced, the central bank used other tools to ensure liquidity:
- Medium-term funds (MLF): A net injection of 200 billion yuan provided banks with medium-term loans (ranging from six months to one year) to support their long-term financing needs.
- Short-term funds (7-day reverse repurchase operations): A net injection of 5826 billion yuan helped address banks' short-term funding requirements.
- Overnight reverse repurchase facilities: Newly introduced in June, these facilities were used at the end of the month to assist banks in managing their cross-month funding needs, as bank liquidity tends to be tight at that time. This combination of measures ensured that banks had sufficient funds, and market liquidity remained unaffected.
3. Policy Logic: Supportive but Not Excessive Liquidity Injection
The central bank did not want to simply inject large amounts of money into the economy; instead, it aimed for "targeted support":
- The market already had a considerable amount of funds. Further massive government bond purchases would have pushed interest rates too low, leading to idle capital circulating within the financial sector rather than being invested in the real economy.
- By adjusting the volumes of different tools, the central bank aimed to keep market interest rates fluctuating around the policy rate (such as the MLF rate). This ensured that businesses could obtain affordable funding while preventing funds from being wasted on financial arbitrage. In expert terms, this approach emphasizes a combination of quantity and price control for flexible regulation.
4. Future Trends in Government Bond Purchases: Focus on the 10-Year Government Bond Yield
Experts predict that if the yield on 10-year government bonds falls below 1.7% (currently at 1.73%), the central bank may further reduce or even stop purchasing these bonds. Lower yields indicate a more relaxed market situation, meaning there is less need for additional liquidity injections. Therefore, by monitoring this yield, we can roughly predict whether the central bank will continue to buy government bonds in the future.
5. Preparing for Short-Term Funding Challenges
In June, interbank funding rates showed some upward trends (indicating potential short-term tightness), but the central bank was prepared:
- The scale of 3-month buyback reverse repurchase operations (a tool to withdraw funds) was reduced compared to the previous month.
- The MLF program was expanded by 200 billion yuan to supplement medium-term liquidity.
- New overnight reverse repurchase facilities were used at the end of the month to help banks manage their cross-month funding needs. These actions demonstrate the central bank's forward-looking approach: anticipating potential funding shortages and taking timely action to prevent significant market fluctuations.
Conclusion
The central bank's actions in June were aimed at "precisionally adjusting the structure" of its liquidity policy: reducing long-term government bond purchases to avoid idle capital circulation, while using other tools to maintain sufficient liquidity. This approach supports the real economy while mitigating financial risks. The overall tone of monetary policy remains supportive, but with a greater emphasis on precision and flexibility. Individuals can pay attention to changes in the yield on 10-year government bonds, as it serves as an important indicator of the central bank's policy adjustments.