(Bloomberg) — China’s central bank is introducing so-called outright reverse repurchase agreements as a monetary policy tool.
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The People’s Bank Of China will conduct monthly outright reverse repos with primary dealers, according to a statement. The move is aimed at maintaining a reasonable level of liquidity in the banking system and to enrich its toolkit for monetary policy, the PBOC said.
The repurchase targets include sovereign bonds, local government notes, financial bonds and corporate debt in these operations, it said. In principle, the operations would be for a period of no more than a year.
The PBOC has been revamping its policy framework in a shift that could allow it to operate more like global peers and influence market borrowing costs more effectively. It has been downplaying the role of the medium-term lending facility as a key rate while transitioning to using the seven-day reverse repo notes as the main policy lever to deliver a clearer signal.
The new tool is likely to provide a longer-term liquidity injection to the interbank market and could help with an expected increase in bond issuance from China, according to Becky Liu, head of China macro strategy at Standard Chartered Bank in Hong Kong.
“Outright repo has an underlying exchange of bonds. so banks can hopefully free up longer term liquidity,” she said. “The PBOC can prepare banks to facilitate a rise of government bond issuance ahead.”
–With assistance from Shulun Huang.
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