On October 23rd, the central bank launched a 7-day reverse repurchase operation of 808 billion yuan through interest rate bidding, achieving a net investment of 702 billion yuan in the open market on that day. For the large-scale reverse repurchase investment, the central bank stated in the announcement that this is to hedge against factors such as peak tax periods and government bond issuance payments, and to maintain a reasonable and sufficient liquidity of the banking system.

01 | Two major factors contributing to the increase in liquidity demand. Last week, the 7-day repurchase rate (R007) in the interbank market and the weighted average interest rate (DR007) for 7-day pledge-based repurchase of interbank deposit institutions exceeded 3% and 2.3%, respectively, far exceeding the 7-day reverse repurchase rate by 1.80%. Therefore, the central bank continues to increase the investment in reverse repurchase to meet market liquidity demand. The recent increase in liquidity demand is mainly due to two main factors: firstly, October is the month of tax payment, and usually fiscal revenue exceeds expenditure, which brings some funds back to the market and puts some pressure on liquidity. Secondly, the recent issuance of special refinancing bonds has put significant pressure on the supply of government bonds. Since Inner Mongolia announced its plan to issue special refinancing bonds at the end of September, as of October 20th, 22 regions have issued or disclosed special refinancing bond issuance plans, with a total scale of over 900 billion yuan. Overall, the increase in liquidity demand in recent times is due to an increase in endogenous market demand, which is a phased phenomenon and not affected by special events. It is expected that over time, the market liquidity supply and demand will gradually stabilize.

02 | The recent tight funding situation is behind the continuous large-scale reverse repurchase by the central bank. After the cross season, the easing of funds in October was less than expected, and the funds interest rate remained fluctuating at a medium to high level. Due to factors such as government bond issuance and tax period disturbances, the funding situation has significantly tightened recently. Since October, local special refinancing bonds have been issued intensively, resulting in a certain "pumping" effect on the capital surface due to the increased supply. October is a traditional tax payment month, and tax period factors also cause disturbance to the capital surface. Guangfa Securities stated in its research report that the deadline for tax declaration in October is October 23rd, and it is expected that the recent tightening of funds will also be affected by tax period disturbances. From a historical perspective, the high interest rate of funds in mid October generally occurred a few working days before the tax declaration deadline. As of now, the disturbance of the tax period on the face of funds has been basically reflected, and its impact will be significantly alleviated in the future. Looking ahead to the future market, there are still factors that may cause disruptions in the funding market. It is expected that the central bank will continue to increase the investment of reverse repurchase funds in a timely manner to protect the stable operation of market funding.

03 Jingtai Viewpoint | It is expected that the central bank will increase its investment. As the supply peak in October passed, the net increase of government bonds from November to December is expected to fall significantly, and the probability of special treasury bond landing in the year may be small, which will not bring new increase of government bonds. Moreover, the demand for allocation is expected to be further released, or the supply pressure will be eased. It is expected that the funding situation will remain neutral and tight in the fourth quarter, but with the weakening of disturbance factors such as government bond supply, exchange rate pressure, and centralized tax payment, market interest rates may fluctuate narrowly around the policy interest rate center. At the same time, it is expected that the central bank will increase its funding efforts to smooth out excessive fluctuations in funding and stabilize market expectations. Overall, fiscal and monetary policies continue to be more proactive, with stronger countercyclical adjustment efforts. The central bank uses various tools to flexibly operate and protect its funding, and creates a suitable monetary environment for the recovery of the real economy. It is expected that market liquidity will continue to remain reasonably abundant.