China launches new lending tool
28 October 2024 China
Image: Eagle/stock.adobe.com
China’s central bank has incorporated outright reverse repos into its monetary policy toolbox.
The People’s Bank of China (PBOC) said that it will use the new lending tool to trade with primary dealers in open market operations (OMO) once a month, with a tenor of less than one year.
The PBOC's liquidity toolkit already 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.
Outright reverse repos will fill a gap for periods ranging from 1 to 12 months and better offset the concentrated maturity of the MLF before the end of the year, according to the State Council of the People’s Republic of China.
“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,” the government body says.
“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 People’s Bank of China (PBOC) said that it will use the new lending tool to trade with primary dealers in open market operations (OMO) once a month, with a tenor of less than one year.
The PBOC's liquidity toolkit already 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.
Outright reverse repos will fill a gap for periods ranging from 1 to 12 months and better offset the concentrated maturity of the MLF before the end of the year, according to the State Council of the People’s Republic of China.
“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,” the government body says.
“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.”
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