China’s Central Bank to add temporary repos depending on market conditions

China’s Central Bank to add temporary repos depending on market conditions

China’s central bank will conduct temporary bond repurchase or reverse repurchase operations in the afternoon, in addition to its traditional morning operations, tightening its control over short-term interest rates.

The People’s Bank of China said it will conduct such operations “depending on the market situation” between 4 p.m. and 4:20 p.m. each working day, according to a statement on Monday.

The move is aimed at “ensuring reasonable and sufficient liquidity in the banking system and to improve the precision and effectiveness of open market operations,” according to the statement.

This follows a hint from PBOC Governor Pan Gongsheng last month for interest-rate reform, where he signaled the bank will consider moving to using a single short-term rate to guide markets. The PBOC may also narrow the interest rate corridor within which market rates are allowed to fluctuate, to signal a clearer policy target, he added.

The central bank said Monday that the duration of the extra operations would be overnight with fixed rates set at seven-day reverse repo rate minus 20 basis points and plus 50 basis points.

“It effectively narrows China’s interest rate corridor, from previously nearly 250 basis points to 70 basis points,” said Becky Liu, head of China Macro Strategy at Standard Chartered. “It will lead to a reduction of interbank rate volatility.”

“With reduced volatility, this rate will be used more widely as a benchmark reference rate across most assets and liability pricing across deposit rates and loan rates,” Liu added.

The PBOC recently took a fresh step toward selling government bonds, saying on Friday it now has hundreds of billions of yuan worth of securities at its disposal to borrow, and would sell them depending on market conditions.

China’s sovereign bonds have surged this year on the back of the country’s gloomy economic outlook and expectations for interest rate cuts. The lack of attractive alternatives and a switch out of savings to financial investments has fanned demand. This led to a series of warnings from the PBOC on the risks of a bond bubble, particularly in longer-dated debt.

The idea of the PBOC trading bonds as a potential tool came to the market’s attention via an old speech by President Xi Jinping, although such operations are also seen as a longer-term plan for better liquidity management in the financial system.