1. This is also a new tool introduced by the central bank after temporary reverse repurchase agreements and government bond transactions since the beginning of this year; 2. The term of the bond repurchase shall not exceed 1 year, which can further enrich the liquidity management tools and better hedge against the concentrated maturity of MLF before the end of the year; 3. Overseas investors are more accustomed to the buy-back agreements commonly used internationally.
Caifeng.com reported on October 28th (Reporter Wang Hong) Today, the central bank's official website announced that it will use buy-back reverse repurchase tools in open market operations, which is a new tool introduced by the central bank this year following temporary normal reverse repurchases and government bond trading.
Industry experts pointed out that the term of the buy-back reverse repurchase does not exceed 1 year, which can further enrich liquidity management tools. The new tool introduced by the central bank at this time is also expected to better hedge the concentration of MLF maturing by the end of the year. In addition, the buy-back reverse repurchase adopts rate bidding and multi-price bid, which can more accurately reflect the degree of institutions' demand for funds. Overseas investors are more accustomed to the internationally common buy-back repurchase method, and today's action by the central bank is expected to drive the development of buy-back repurchase business.
Enrich liquidity management tools, better hedge the concentration of MLF maturing by the end of the year.
According to a reporter from Caifeng.com's investigation of the existing liquidity injection tools of the central bank, from short to long term, they mainly include 7-day reverse repurchase operations in the open market, 1-year medium-term lending facility (MLF), and the purchase of long-term liquidity through government bond buying and required reserve ratio cuts. There is a lack of medium-term liquidity injection tools ranging from 1 month to 1 year.
Analysts believe that the term of the buy-back reverse repurchase does not exceed 1 year, further enriching liquidity management tools. This time, the central bank introduced buy-back reverse repurchases based on existing tools, and it is expected to cover periods such as 3 months, 6 months, enhancing the ability to adjust liquidity across periods of less than 1 year, further improving the precision level of liquidity management.
Wind data shows that there is 1.45 trillion yuan of MLF maturing in November and December, reaching 40% of the current MLF balance. Coupled with government bond issuance, year-end cash injection, etc., the liquidity of the banking system may face considerable pressure to make up for the shortfall. Experts stated that the central bank's choice to introduce new tools at this time is expected to better hedge the concentration of MLF maturing by the end of the year.
Central bank governor Pan Gongsheng previously stated at the Financial Street Forum that it is expected to selectively reduce the reserve requirement ratio by 0.25-0.5 percentage points by the end of the year based on market liquidity conditions. The above-mentioned experts also stated that the central bank's introduction of buy-back reverse repurchase operations at this point is beneficial for better hedging the concentration of MLF maturing in the fourth quarter, and has a greater ability to maintain a reasonably sufficient liquidity at the end of the year, providing a favorable monetary and financial environment for stable economic growth.
More accurately reflecting institutions' demand for funds, it is expected to drive the development of the buyback trade.
The buyback repurchase launched this time adopts fixed quantity, rate tender, and multiple price bid winning. Institutions can choose different bid rates based on their own situation, with bids awarded in descending order of rates. The bid-winning rate for institutions is their own bid rate.
Industry experts point out that this not only reduces institutions' "free-rider" behavior in rate tenders, but also more accurately reflects institutions' degree of fund demand. Also, since there is no addition of new monetary policy instruments' bid-winning rates, it highlights the positioning of this tool only as a liquidity infusion tool.
"The mainstream model in China's money market is collateral repo, where the bond collateral in the transaction is frozen in the fund-receiving account, unable to continue circulating in the secondary market, which is unfavorable for safeguarding the rights of the fund-providing party in extreme cases such as defaults. After more overseas investors enter China's bond market, they are more accustomed to the buyback repurchase model widely used internationally," experts say. The central bank's introduction of buyback repurchase not only enriches its own operating tools, but also can serve as a demonstration for market development of buyback trades, alleviating the pressure on financial institutions' overall liquidity supervision indicators caused by collateral freezing, continually enhancing the market's liquidity, safety, and internationalization levels.
