China’s central bank to implement temporary bond repos to enhance liquidity

On Monday, China’s central bank said it would begin conducting temporary bond repurchase agreements or exchange repos to enhance the efficiency of open market operations and keep ample banking system liquidity.

China’s central bank, the People’s Bank of China (PBOC), announced on Monday that it will begin conducting temporary bond repurchase agreements (repos) and reverse repos to improve open market operations and maintain ample liquidity within the banking system.

Introduction of a New Interest Rate Corridor

Market participants and analysts believe this move sets the stage for a new interest rate corridor. The seven-day reverse repo rate will serve as a central guide, providing the bank with greater flexibility to manage cash conditions and interest rates amid high demand for bonds.

This development follows statements from the central bank’s governor, who noted that the seven-day rate “basically fulfils the function” as the main policy rate.

Operational Details

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The temporary repos and reverse repos will involve overnight loans and will be conducted based on prevailing market conditions.

The interest rates for these temporary measures will be set at 1.6% (20 basis points below) for temporary repos and 2.3% (50 basis points above) for temporary reverse repos, relative to the seven-day reverse repurchase operations.

Statements from the PBOC

“From now on, the People’s Bank of China (PBOC) will conduct temporary repos or temporary reverse repo operations depending on conditions,” the central bank stated in an online announcement.

Reverse repo operations will enable the central bank to inject cash into the banking system, while repos will withdraw funds.