China’s central bank to add tool to better manage short-term liquidity

[SHANGHAI/BEIJING] China’s central bank on Thursday (Jun 25) said it will debut overnight lending next week, offering reverse-repos to banks and brokers as it deepens control over what have been volatile short-term interest rates.

The People’s Bank of China (PBOC) plans to inject cash into the banking system on Jun 29 and Jun 30 – the month-end, when seasonal demand tends to spike – using the newly-created overnight reverse-repos in order to “better meet short-term liquidity needs”.

The tool’s debut follows an announcement last week by governor Pan Gongsheng that the bank intended to introduce overnight repos to improve control over very short-dated rates.

The PBOC did not say if the overnight reverse repos would be used regularly but some analysts think the introduction signals that the overnight rate is growing in importance as a central bank target.

“This is a key step in China’s interest rate reform,” Guosheng Securities said in a note. The brokerage said the move could lower overnight market rates, and “is good for the bond market.”

Bonds rallied in response to Thursday’s news, with 30-year treasury futures jumping 50 ticks to a three-week high.

The PBOC had also announced measures last week to narrow the range of short-term rates in a bid to reduce money market volatility, and Pan said it was studying a tool to support non-banking financial institutions in a crisis.

Ming Ming, chief economist at Citic Securities, said that adding the overnight tool at the end of June, when banks typically face seasonal liquidity pressure, reflects the PBOC’s desire to ensure market stability.

But the timing also shows overnight reverse repo is supplementary and may not be used on a regular basis, he said.

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The PBOC said overnight reverse repos will be conducted through quantity bidding at fixed interest rates, in the same way seven-day counterparts are conducted.

Guosheng Securities expects the PBOC to set the overnight rate at 1.3 per cent in bidding, compared with 1.4 per cent for the seven-day rate, which is currently the PBOC’s main policy rate in the money market. REUTERS