(Yicai Global) July 7 -- China’s central bank has drastically reduced the amount of liquidity in the financial system this week by issuing the lowest daily amount in open market operations in the past 12 years for three consecutive days, leaving analysts perplexed.

The People’s Bank of China infused just CNY3 billion (USD447 million) a day in seven-day reverse repo operations from July 4 to July 6, the first time that the amount has fallen under CNY10 billion (USD1.5 billion) this year, according to the latest data.

In June, the central bank injected CNY100 billion (USD14.9 billion) of these short-term lending instruments. Then on July 1, it extended just CNY10 billion in credit, and this then plunged to CNY3 billion for the first time since 2010. There have only been 20 seven-day reverse repos under CNY10 billion since 2010, according to financial statistics platform Wind.

The aim of trimming the reverse repo’s scale is to retrieve previously injected liquidity and probably also to moderately control leverage in the market, said Huang Weiping, chief fixed income analyst at Industrial Securities.

The move is to stabilize market expectations, so as to avoid an abrupt cease in liquidity injections, which will trigger concern at financial institutions, said Gao Yu, chief fixed income analyst at Zheshang Securities. It will also moderately control the amount of borrowing in the bond market and lower financial risks.

This might signal the shift from ‘crisis’ mode, which characterized the country’s monetary policy since the latest Covid-19 outbreaks in April, to normal mode, said Ming Ming, chief economist at Citic Securities. Fiscal policy may also enter a stage of observation and reassessment.

Based on historical precedent, non-normal operations tend to be a sign that the central bank will cease monetary easing, said Li Yishuang, chief fixed income analyst at Cinda Securities.

Gao, though, said that the market does not need to be too concerned for there is little pressure on short-term capital. The PBOC aims to mitigate risks in the banking system amid rising leverage in the bond market, he added.

Editors: Xu Wei, Kim Taylor