China’s c. bank for more efficient banking liquidity

China’s central bank, the People’s Bank of China (PBC), announced a on Monday new procedures to improve control over liquidity and interest rates in the banking system.

The PBC will begin conducting temporary repurchase agreements (repos) and reverse repos, with maturities of one day (overnight).

These operations will be used based on market conditions to provide the central bank with more flexibility in managing cash flow.

The temporary repo rate will be 20 basis points lower than the seven-day reverse repo rate, at 1.6 per cent. The reverse repo rate will be 50 basis points higher, at 2.3 per cent.

This allows the PBC to inject cash into the banking system through reverse repos, while withdrawing funds through repos, said Frances Cheung, rates strategist at OCBC Bank.

Analysts also see the possibility of these temporary rates becoming formal policy tools in the future.

China’s bond yields rose slightly following the PBC announcement, with the 30-year government bond yield increasing by 2.5 basis points and the 10-year yield rising by 2 basis points. Analysts interpret this as a signal from the central bank to cool the bond market.

The PBC is expected to conduct its first temporary operation this week, likely a repo to absorb excess liquidity. The central bank has also indicated that these overnight operations will be conducted in the afternoon, separate from their regular daily open market operations held in the mornings.

Attribution: Reuters