(Yicai) July 6 -- China's central bank resumed net liquidity injections today through a three-month outright reverse repo operation, marking the end of several months of gradually withdrawing liquidity from the financial system.

The previous period of excess liquidity has basically come to an end, meaning there is no longer a need for the People's Bank of China to keep withdrawing cash, analysts said. Going forward, they expect the central bank to take a more neutral approach while continuing to ensure liquidity remains sufficient.

The PBOC will conduct a CNY1 trillion (USD140 billion) 91-day outright reverse repo operation on July 6 to maintain ample liquidity in the banking system, the central bank said on July 3. The operation will use an interest-rate bidding process with winning bids determined at multiple price levels and will mature on Oct. 5.

With CNY800 billion of the same instrument due to mature this month, the latest operation represents a net injection of CNY200 billion (USD29 billion), ending the central bank's pattern of reducing outstanding reverse repo balances in the past months.

Market interest rates rose back toward the PBOC's policy rates in June, prompting the central bank to shift toward a more supportive stance, said Ming Ming, chief economist at CITIC Securities. With a large volume of reverse repos maturing, July's net liquidity injection also reflects the central bank's loose monetary orientation and its intention to support medium- and long-term liquidity conditions.

The earlier period of loose market liquidity has been reversed, reducing the need for the PBOC to continue net liquidity withdrawals through three-month reverse repos, said Wang Qing, chief macro analyst at Golden Credit Rating International. After government bond issuance picked up sharply in the final week of June, issuance remained elevated during the first week of July. From this perspective, increasing the size of this month's reverse repo rollover should help ensure government bond sales proceed smoothly, he added.

Wang expects the central bank to eventually resume net injections of medium-term liquidity across the board. This will be an important support for government bond issuance and bank lending this year, reinforcing the PBOC's pro-growth monetary policy stance.

However, market participants believe that short-term funding pressures have not disappeared. First, government bond issuance was relatively slow during the first half of the year, raising the likelihood of a faster issuance pace in the second half. Second, July is a major tax payment month, and tax-related cash outflows could temporarily tighten liquidity. Third, CNY1.7 trillion (USD250.3 billion) of outright reverse repos and CNY400 billion of medium-term lending facility loans are scheduled to mature this month.

Editor: Kim Taylor