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Beijing Business Daily (Reporter Liu Sihong) On August 26, according to the People's Bank of China, in order to maintain a reasonable level of liquidity in the banking system at the end of the month, the People's Bank of China conducted a reverse repurchase operation of 471 billion yuan in a fixed interest rate and quantity bidding method, with an operating interest rate of 1.7%, the same as before. At the same time, the People's Bank of China conducted a medium-term lending facility (MLF) operation of 300 billion yuan in an interest rate bidding method, with a winning rate of 2.3%, the same as before.

Recently, the discussion about reverse repurchase is in full swing, but while everyone is expressing their feelings, there are also many doubts. What exactly is reverse repurchase? Why is reverse repurchase carried out? What specific impact does reverse repurchase have on us?

Public information shows that reverse repurchase is a primary dealer system for open market operations established by the People's Bank of China in 1998. It refers to the transaction behavior of the People's Bank of China purchasing securities from primary dealers and agreeing to sell the securities to primary dealers on a specific date in the future. Reverse repurchase is the operation of the People's Bank of China to inject liquidity into the market, and positive repurchase is the operation of the People's Bank of China to withdraw liquidity from the market.

In layman's terms, the reverse repo process is mainly the central bank's purchase of securities from primary dealers, lending funds, and releasing liquidity to the market. Among them, primary dealers mainly include 51 qualified financial institutions (including banking institutions and securities companies), which sell marketable bonds (such as treasury bonds, local bonds, etc.) to the central bank, which is equivalent to the central bank lending funds, and money flows from the central bank to the market, thereby increasing market liquidity. This process is also commonly known as "flooding".

At the same time, the two parties will also agree that at a specific date in the future, the primary dealer will buy back the securities from the central bank. This is equivalent to the central bank injecting funds, that is, after the reverse repurchase expires, the money will flow from the primary dealer to the central bank, so that the money in the market will decrease, which is commonly known as "water withdrawal", that is, positive repurchase operation.

So, when does the reverse repo operation take place? When does the positive repo operation take place? Simply put, when there is too much money in the market, leading to currency depreciation, hyperinflation or capital idleness, the central bank will consider withdrawing funds, which will include positive repo operations.

In contrast, reverse repo is when the market is experiencing liquidity tension, that is, when there is a "lack of money", the central bank will inject a large amount of funds into the market, generally to stabilize the market. After primary dealers obtain funds through reverse repo, they will lend the funds to other small and medium-sized banks to provide funds for the market, thus alleviating the short-term liquidity tension in the market.

When does liquidity tighten? It usually occurs during major holidays and at the end of the month, quarter, and year. At this time, residents tend to withdraw a large amount of money from banks for consumption. At this time, major companies also have to pay wages, bonuses, and benefits to employees. Therefore, at special time points such as the end of the month, quarter, half year, and year, the central bank will operate large-scale reverse repurchases to maintain market liquidity.

It should be noted that the central bank can influence short-term market interest rates by adjusting the reverse repurchase rate. At present, the 7-day reverse repurchase operation rate has basically assumed the function of the main policy interest rate. From the perspective of recent operations, it is mainly maintained at 1.7%.

Zhou Maohua, a macro researcher at the Financial Market Department of Everbright Bank, told the Beijing Business Daily that at present, reverse repurchase operations have become an important monetary policy tool for the central bank to adjust the money supply and market interest rates. Simply put, primary dealers sell eligible securities such as treasury bonds to the central bank to obtain funds, and institutions obtain funds. According to the agreement, the institutions buy back the bonds at a specific time in the future and exchange the money for the central bank. Reverse repurchase operations are the central bank injecting liquidity into the market, and vice versa, positive repurchase is the central bank withdrawing liquidity from the market.

Economic and financial activities are relatively complex. The central bank created tools such as reverse repurchase to flexibly respond to market demand for funds of various maturities, ensure the smooth operation of economic and financial activities, create wealth, and effectively prevent potential risks. At the same time, reverse repurchase operations can influence market interest rates and market expectations, thereby regulating investment and consumer financing activities.

In Zhou Maohua's view, the central bank's increased efforts in reverse repurchase operations, maintaining reasonable liquidity in the market and keeping interest rates low will help reduce residents' consumption financing costs and encourage consumer spending. At the same time, it will also help reduce corporate financing costs and promote investment, output and employment.

So, what impact will the central bank's increased reverse repurchase operations have on us? Zhou Maohua further said that the central bank's reverse repurchase operations regulate market liquidity and will also affect the market's expectations of policies and interest rates. Increasing reverse repurchase operations increases market capital supply and stabilizes economic lending rates. At the same time, it also releases a relatively positive policy orientation, which is good for the stock market and bond market. However, it is worth mentioning that the stock market and bond market are also affected by other macroeconomic performance, corporate profits, market supply and demand, market sentiment and other factors.