To maintain the proper and adequate liquidity of ​banks, further enrich the central bank's mmf policy toolkit, the People's Bank of China (referred to as the "central bank") announced on the morning of October 28th on its website that it has decided to start using open market buy-back reverse repurchase operations from today.

The target of the operation is the first-tier dealers in the open market business, who will conduct the operation once a month in principle, with a maturity not exceeding one year. The open market buy-back reverse repurchase adopts a fixed quantity, interest rate bidding, and multiple price bidding. The repurchase ​symbol includes ​bonds, local government bonds, financial bonds, corporate credit bonds, among others. The operation results will be disclosed through the relevant column on the central bank's website.

The term of the buy-back reverse repurchase does not exceed one year, further enriching the liquidity management tools. After reviewing the central bank's existing liquidity injection tools, ranging from short to long term, it mainly includes 7-day reverse repurchase operations in the open market, 1-year Medium-term Lending Facility (MLF), as well as the purchase of government bonds and reserve requirement reduction for long-term liquidity injection. Short-term and medium-term liquidity injection tools with maturities ranging from 1 month to 1 year are relatively lacking.

According to central bank insiders, with the launch of buy-back reverse repurchase based on existing tools, it is expected to cover periods such as 3 months and 6 months, enhance the liquidity cross-period adjustment capability within one year, and further improve the precision of liquidity management.​

The central bank's choice to introduce new tools at this time is expected to better offset the concentrated maturity of the Medium-term Lending Facility (MLF) by the end of the year. Wind data shows that there will be 1.45 trillion yuan of MLF maturing in November and December, reaching 40% of the current MLF balance. In addition to government bond issuance and year-end cash injections, there may be significant pressure on the liquidity of the banking system. Previously, Pann Chancellor stated at the Financial Street Holdings forum that he expects to selectively reduce reserve requirements by 0.25 to 0.5 percentage points by the end of the year depending on market liquidity conditions.

The central bank's introduction of buy-back reverse repurchase operations at this point is beneficial for better hedging the concentrated maturity of MLF in the fourth quarter, better maintaining reasonable and adequate liquidity at the end of the year, and providing a good monetary and financial environment for stable economic growth.

According to central bank insiders, the buy-back reverse repurchase uses interest rate bidding, multiple price bidding, and is positioned as a liquidity injection tool. The buy-back reverse repurchase introduced this time adopts fixed quantity, interest rate bidding, and multiple price bidding. Institutions can choose different bid rates based on their own situation, and bids are accepted in descending order of interest rates. The bid interest rate of the institution is their own bid rate. This not only reduces the behavior of institutions free-riding during the interest rate bidding, but also more accurately reflects the degree of institutions' demand for funds. Also, since there is no addition of new monetary policy tools in terms of bid interest rates, it emphasizes that this tool is strictly positioned as a liquidity injection tool.

Some analysts point out that the more diversified central bank operating tools are expected to drive the development of buy-back repurchase business across the entire market. The mainstream model of China's money market is pledged repo, where the bond collateral is frozen in the funding recipient's account and cannot continue to circulate in the secondary market, which is not conducive to safeguarding the interests of the funding provider in extreme cases of defaults. As more overseas investors enter the Chinese bond market, they are more accustomed to the buy-back repurchase commonly used internationally. The central bank's introduction of buy-back reverse repurchase not only enriches its own operating tools but also serves as a demonstration for the market to develop buy-back repurchase business, alleviating the pressure on financial institutions' overall liquidity regulation indicators caused by frozen collateral, and continuously improving the liquidity, safety, and internationalization levels of the interbank market.

Editor/ping