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Central bank injects liquidity into market through reverse repos

By Wang Xinyuan (Global Times)

08:25, August 22, 2012

The People's Bank of China (PBC), the central bank, injected a total of 220 billion yuan ($35 billion) into the market via seven-day and 14-day reverse repos Tuesday, a historic high for a single-day, a move market analysts say may help take off the pressure to further ease monetary policy.

The PBC offered 150 billion yuan worth of seven-day reverse repos at 3.4 percent and 70 billion yuan worth of 14-day reverse repos at 3.6 percent. With a total of 87 billion yuan scheduled to be drained this week due to maturing bills, repos and reverse repos, the offer will amount to a net injection of 133 billion yuan.

In a reverse repo operation, the central bank purchases government bonds from dealers with the agreement to sell them at a higher price at a specific future date, a move to increase liquidity.

A reverse repo rate sets the lowest possible cost of funds and serves as a floor rate that commercial banks will offer to each other.

Currently the market liquidity is still very tight, therefore the central bank conducted a large volume of reverse repos, which is aimed to replace the cut on reserve requirement ratio temporarily, the National Business Daily reported Tuesday citing Liu Junyu, a financial market analyst with China Merchants Bank.

"The central bank's action today basically just satisfied current demand, but didn't in any way exceed it in a way that would bring rates down," Reuters reported Tuesday citing a trader in Shanghai.

Despite the injection, the money market rates continued to rise. The seven-day benchmark Shanghai Interbank Offered Rate (SHIBOR) rose 16 basis points to 3.7458 percent Tuesday from Monday while and 14-day SHIBOR rate moved to 4.5267 percent Tuesday, up 10 basis points from Monday.

The PBC had already injected 75 billion yuan worth of liquidity into the open market via reverse repos last week.

The central bank's way of injecting liquidity by reverse repos alone will hardly ease the situation, and it is still likely that the reserve requirement ratio will be further cut in the second half of this year, Shenzhen-based Penghua Fund said on its official Sina Weibo Tuesday.

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