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Central bank makes rare use of reverse repos

(China Daily)

13:22, September 14, 2012

China's central bank on Thursday used money market methods it hasn't used in a decade to discharge liquidity, postponing the prospect of a further cut in the reserve requirement ratio. (Photo/China.org)

China's central bank on Thursday used money market methods it hasn't used in a decade to discharge liquidity, postponing the prospect of a further cut in the reserve requirement ratio.

The People's Bank of China bought 20 billion yuan (US$3.17 billion) worth of securities from selected banks, with a promise to sell them back 28 days later and charging a rate of 3.6 percent, according to a statement on its website.

It's the first time the central bank has used 28-day reverse repos since December 2002.

Simultaneously, the central bank also auctioned 35 billion-yuan seven-day reverse repos at a rate of 3.35 percent.

"The extension of the tenor of reverse repos suggests policymakers are continuing to favor temporary measures over cutting the required reserve ratio, which would be a permanent solution," Dariusz Kowalczyk, a senior economist and strategist at Credit Agricole CIB, wrote in a research note e-mailed to China Daily

"It is possible that the reserve requirement ratio will not be cut anytime soon. This means that interbank liquidity will likely remain relatively tight."

The reverse repo rates are lower than current market levels. But the move failed to ease the interbank lending rate on Thursday, as the new operations are smaller than maturing ones, in effect subtracting liquidity.

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