New repo, reverse repo tools to guide interest rates

The People's Bank of China, the country's central bank, announced new open market operation tools on Monday, which experts said will help the central bank improve liquidity management and better guide market interest rates.

The PBOC said on Monday that, from now on, it will conduct temporary repurchase and reverse repurchase agreements — also known as temporary repos and reverse repos — depending on market conditions.

The operations, with a term of overnight, will be conducted from 4 pm to 4:20 pm on working days as needed, in addition to its traditional morning operations of seven-day reverse repos operations.

The interest rates of the temporary repos and reverse repos will be 20 basis points below and 50 basis points above the seven-day reverse repos operations, or 1.6 percent and 2.3 percent, respectively.

Zhang Xu, a fixed-income analyst at Everbright Securities, said the temporary repos and reverse repos will help supply base money when there is a liquidity shortage and withdraw liquidity when there is an excess, helping to stabilize fluctuations in the money market.

Wang Qing, chief macroeconomic analyst at Golden Credit Rating International, said the additional tools will pave the way for a new interest rate corridor — a system that helps manage short-term interest rates in the economy, with 1.6 percent the lower limit and 2.3 percent the upper limit.

This indicates that the width of the interest rate corridor will be significantly narrowed from 245 basis points to 70 basis points, which will help reduce the volatility of short-term market interest rates and more clearly convey the central bank’s monetary policy signals, Wang said.