China's central bank introduces new liquidity tool

China's central bank on Monday incorporated outright reverse repos, a new liquidity tool, into its monetary policy toolbox to keep liquidity reasonable and ample in the country's banking system.

The People's Bank of China (PBOC) will use outright reverse repos to trade with primary dealers in open market operations, the bank said in a statement on its website, adding that outright reverse repos will be carried out once a month, with a tenor of no more than one year.

The new tool is regarded as a further enrichment of the country's monetary policy toolkit following the introduction of temporary repos, temporary reverse repos, and the buying and selling of treasury bonds.

The PBOC's liquidity toolkit mainly includes seven-day reverse repos and a one-year medium-term lending facility (MLF), as well as treasury bond purchases and reserve requirement ratio (RRR) cuts for injecting long-term liquidity.

The introduction of outright reverse repos fills a gap in the PBOC's liquidity toolbox, which previously lacked a tool for periods ranging from one month to one year, analysts say, noting that this new tool is expected to better offset the concentrated maturity of the MLF before the end of the year.

There will be 2.9 trillion yuan (about 406.69 billion U.S. dollars) of maturing in the MLF in November and December 2024 -- accounting for 40 percent of the current MLF balance, according to Wind data. This, coupled with other factors, may pose significant pressure to the banking system's liquidity at year-end.

The introduction of the new tool will help maintain reasonable and ample liquidity at the end of 2024, providing a favorable monetary and financial environment for stable economic growth, analysts explained.

Currently, the mainstream model of China's monetary market is pledged repos, where bonds used as collateral are frozen in the account of the fund borrowers and cannot circulate in the secondary market.

This is not conducive to protecting the rights and interests of fund lenders in the event of a default or other extreme scenarios. Overseas investors, who are increasingly entering China's bond market, are more accustomed to outright repos, which are commonly used internationally.

The central bank's introduction of the new tool will help boost the development of the outright repo business, and enhance the liquidity, safety and internationalization level of China's interbank market, according to analysts.