(Bloomberg) -- China’s central bank is expanding its monetary policy toolkit to get a better handle on liquidity in the financial system as it seeks to add more levers to fine-tune the economy.
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The People’s Bank of China will conduct outright reverse repurchase agreements with primary dealers monthly for a timeframe of no more than a year, according to a statement Monday. The move is aimed at maintaining a reasonable level of liquidity in the banking system and enriching its toolkit for monetary policy, the PBOC said.
A so-called reverse repo is a form of short-term borrowing used in money markets, which involve the purchase of a security with an agreement to sell it back at a specific date. Here, the securities will include sovereign bonds, local government notes and corporate debt, the PBOC said.
The central bank has been revamping its policy framework in a shift that could allow it to operate more like global peers and influence market borrowing costs more effectively. It has been downplaying the role of the medium-term lending facility as a key rate while transitioning to using seven-day reverse repo as the main policy lever to deliver a clearer signal, with the new operations maturities likely to sit between the two.
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The new tool is likely to provide a longer-term liquidity injection to the interbank market and could help with an expected increase in bond issuance, according to Becky Liu, head of China macro strategy at Standard Chartered Bank in Hong Kong.
“Outright repo has an underlying exchange of bonds. so banks can hopefully free up longer term liquidity,” she said. “The PBOC can prepare banks to facilitate a rise of government bond issuance ahead.”
Beijing may also have one eye on the US election, choosing to give itself additional tools ahead of the result, lest its currency or bond markets be dramatically impacted, Liu added.
On top of giving the PBOC more options to deal with various liquidity issues, strategists see the tool helping its management of the bond market both through purchases and sales, at a time when China is seen borrowing more to help fund stimulus.
“A more developed outright reverse repo would better connect with global practice,” said Ju Wang, Greater China FX & rates strategist at BNP Paribas SA. It “allows the PBOC to have more bonds to sell later to control long-end yields.”