To maintain ample liquidity in the banking system, the People's Bank of China (PBOC) conducted 500 billion yuan in one-year Medium-term Lending Facility (MLF) operations on August 25, 2026, using a fixed quantity, interest rate bidding, and multiple-price auction mechanism. According to preliminary statistics, 600 billion yuan in one-year MLF loans matured on the same day, resulting in a net withdrawal of 100 billion yuan. This marks a shift to contraction for the MLF after three consecutive months of expanded operations, bringing the outstanding balance down to 7.4 trillion yuan.
Notably, to better align with short-term liquidity needs in the banking system, the PBOC will conduct overnight reverse repurchase (repo) operations from August 27 to September 1, using a fixed interest rate and quantity bidding, with daily operations capped at no more than 600 billion yuan.
The August MLF rollover saw a contraction of 100 billion yuan. Wang Qing, chief macro analyst at东方金诚 (Golden Credit Rating), pointed out that this is the first reduction in MLF in four months, following a 100 billion yuan increase in the previous month. Considering that the two-term outright reverse repo rollover increased by 200 billion yuan in August, this means the central bank's total medium-term liquidity operations for the month grew by 100 billion yuan, marking the second consecutive month of net injection, though the scale was 700 billion yuan lower than the previous month.
Wang Qing analyzed that the reduced MLF rollover in August may be primarily related to the maturity structure of financial institutions' funding needs and does not signal a tightening of liquidity. The second consecutive month of net medium-term liquidity injection has two direct reasons: First, the recent market overnight rate DR001 has been running steadily around the policy rate, and the August medium-term liquidity injection helps maintain ample funding conditions and stabilize market expectations. Second, the Political Bureau of the CPC Central Committee meeting on July 30 noted that in the second half of the year, "macro policies should be intensified for effectiveness, accelerating fiscal spending and the pace of bond fund utilization." This implies that government bond issuance will accelerate, with Q3 set to be the peak issuance period for the year. Therefore, the second consecutive month of net medium-term liquidity injection in August is conducive to supporting smooth government bond issuance, reflecting coordination between monetary and fiscal policies.
Overall, the continued net injection of medium-term liquidity in August signals that monetary policy maintains a supportive stance, helping to boost market confidence. Wang further analyzed that recent market liquidity has been ample, with one-year commercial bank (AAA-rated) certificate of deposit yields remaining at relatively low levels. Combined with the significantly increased frequency of overnight reverse repo operations in August, the funding pressure from government bond issuance appears manageable, which may be one reason the net injection scale in August declined notably from the previous month.
Looking ahead, Wang analyzed that macro policies will lean toward stabilizing growth, including accelerating government bond issuance and expediting the implementation of the 800 billion yuan new-type policy financial instruments, all of which require central bank liquidity support. This implies that medium-term liquidity tools, including MLF and outright reverse repos, are expected to continue expanding in the near term to support government bond issuance and bank credit allocation. This represents a key leverage point for current monetary policy to strengthen counter-cyclical adjustments. Wang also believes that the central bank may not rule out implementing a reserve requirement ratio (RRR) cut later, which could moderately reduce the scale of medium-term liquidity injections, as there is a certain substitution effect between the two.
The PBOC also disclosed in advance that, to better match short-term liquidity demand in the banking system, it will conduct overnight reverse repo operations from August 27 to September 1, using a fixed interest rate and quantity bidding, with daily operations capped at 600 billion yuan. Wang Qing noted that due to factors such as bank assessments, short-term liquidity demand increases at the end of August. The central bank's consecutive overnight reverse repo operations at this time help control fluctuations in the market overnight rate DR001, guiding it to run smoothly around the policy rate center. The single overnight reverse repo operation on September 1 may be related to the relatively large maturity of 7-day reverse repos on that day. Similar to mid-month operations, the central bank announced the upper limit for daily overnight reverse repo operations around the end of the month but did not disclose the specific operation amount, which will be determined based on financial institutions' actual demand, reflecting operational flexibility.
Regarding monthly operational rhythm, Wang Qing noted that the central bank will conduct four overnight reverse repo operations around the end of August (August 27, 28, 31, and September 1); combined with the four operations already conducted from August 14 to 19 (August 14, 17, 18, 19) and one operation on August 3, the total number of overnight reverse repo operations in August reaches eight, significantly higher than July's three and June's two. This indicates that overnight reverse repo operations are rapidly normalizing, playing a notable role in effectively curbing fluctuations in the market overnight rate DR001. Behind these operations is the central bank's accelerated push to transition its monetary policy framework from quantity-based to price-based, with greater emphasis on stabilizing short-term market rates. This also means that DR001 will become "more stable," with the impact of factors such as mid-month tax payment periods, government bond issuance payments, policy tool maturities, and month-end bank assessments significantly weakened.
Looking to the future, Wang Qing speculates that overnight reverse repos may gradually replace 7-day reverse repos as the central bank's core short-term liquidity adjustment tool. From a longer-term perspective, this could also pave the way for the overnight reverse repo rate to replace the 7-day reverse repo rate as the primary policy rate.