PBOC injects a net 1.01 trillion yuan and creates a bond-fund backstop as China’s five-year yield nears a record low

The People’s Bank of China injected a net 1.01 trillion yuan ($151 billion) through reverse repurchase operations in its open market operations, and China’s five-year government bond yield traded near a record low¹. The central bank conducted 412 billion yuan of seven-day reverse repurchase operations on October 27 using a fixed rate².

The central bank has also decided to establish what it calls the Bond Market Non-Bank Large-Scale Redemption Swap Facility, or BNSF, for use in specific scenarios to maintain bond market stability³. The People’s Bank of China issued its official announcement establishing the facility on October 26⁴. That was one day before the latest seven-day reverse repo operation, which the central bank carried out on October 27².

In the currency market, the central bank set a weaker-than-expected daily midpoint, tapping the brakes on the yuan’s rally while the currency hovered near a four-year high⁵. It set the dollar-yuan central rate at 6.7171, compared with 6.7162 the previous day⁶.

Why it matters to investors

The measures point in two directions at once. The cash injection adds liquidity² and coincides with five-year yields near a record low¹. The new swap facility is aimed at non-bank investors facing large-scale redemptions³.

By naming the facility for redemptions⁴, the central bank has signalled concern about stability in the bond market even as yields fall³. Its decision to set a weaker midpoint for the yuan⁵ shows a preference for limiting the pace of the currency’s gains.

Taken together, the moves show the central bank using several tools in the same week: open market operations², a new backstop for the bond market³, and the daily currency fixing⁶.

What to watch

Investors will watch how the facility is used in practice. The five-year yield’s approach to a record low came after the cash injection¹, so the reaction of bond prices to further operations is one gauge of how much demand the liquidity is creating. The central bank has said it applies in specific scenarios³, and the terms of its use will show how far authorities are prepared to go to support non-bank bond holders⁴.

The path of the five-year yield, now near a record low¹, and the size of further reverse repo operations² will indicate whether liquidity conditions keep easing. In the currency market, a further run of weaker-than-expected midpoints⁵ would show whether the central bank continues to slow the yuan’s rise from near a four-year high, after setting the reference rate at 6.7171⁶.