PBOC's move will ease rate fluctuations, raise market liquidity: analysts
China's central bank announced 14-day reverse repurchase agreements (repos) on Wednesday, the first use of the loans since February this year, which analysts said would help ease money market rate fluctuations and relieve intensive reverse repo maturity pressure.
The People's Bank of China (PBOC), the country's central bank, released 14-day reverse repos worth 50 billion yuan ($7.52 billion), with an interest rate of 2.4 percent. Meanwhile, the PBOC offered seven-day repos worth 90 billion yuan on the same day, according to a statement from the bank.
Reverse repo is a process in which a central lender buys securities from banks and resells them in the future. It is a tool used to inject money into the market to enhance market liquidity.
On Wednesday, 100 billion yuan worth of seven-day reverse repos matured, which means the central bank effectively pumped 40 billion yuan into the market, Beijing-based domestic financial news website caixin.com reported.
Market fluctuations
"Longer-dated reverse repos may be adopted by the central bank to ease money market rate fluctuations," Liu Dongliang, an analyst at China Merchants Bank (CMB), told the Global Times on Wednesday.
The country's rising market rate has not been controlled yet. On Wednesday, the benchmark overnight Shanghai Interbank Offered Rate, a daily reference rate to measure the costs by banks borrowing money from other banks in the Shanghai interbank money market, edged up 1 basis point to 2.043 percent, hitting a five-month high, according to caixin.com.
The seven-day repo rate rose by 11 basis points to around 2.51 percent, also hitting a new record from March, financial news portal nbd.com.cn reported on Wednesday.
The 14-day reverse repos could also relieve market liquidity pressure caused by intensive short-term reverse repo maturity, experts noted.
Seven-day reverse repos need frequent operations as they mature in a week, but longer-dated ones can make up for this disadvantage, Liu from the CMB explained.
China's money market liquidity faces pressure due to fund outflow, the US interest rate hike expectation and restlessness in global financial market, Liu Jian, a senior analyst at the Bank of Communications (BOCOM), told the Global Times on Wednesday.
For example, outstanding yuan funds for foreign exchange fell by 190.5 billion yuan to 23.4 trillion yuan in July, data from the PBOC showed on August 14.
Rate reduction outlook
To effectively improve market liquidity, the PBOC should cut the reserve requirement ratio (RRR) rather than refer to open market operations, as market solutions involve a small amount of money and the due time is short, Xu Hongcai, director of the China Center for International Economic Exchanges' Economic Research Department, told the Global Times on Wednesday.
BOCOM analyst Liu Jian said the 14-day reverse repos by the central bank are more or less related to RRR and benchmark interest rate cut expectations.
If the new operation by the PBOC doesn't improve market liquidity - given the downward economic pressure and widening drop in outstanding yuan funds for foreign exchange - China may need to cut RRR to raise market liquidity, he noted.
However, if the PBOC hopes to reduce the impact of the benchmark interest rate cut, then it may choose to cut the reverse repo rate while letting the benchmark interest rate remain unchanged, noted CMB analyst Liu Dongliang.
He believes that the central bank will refer to the market liquidity before it makes any decision on adjusting the benchmark interest rate.
Considering a base money gap is estimated at more than 2 trillion yuan in the market, the central bank will probably cut RRR, Liu Dongliang said. He predicts the central bank will cut interest rates once in 2016 to confront the slow economic growth and reduce enterprises' fundraising costs.
