Central bank to introduce SLO

The People's Bank of China (PBC) will allow 12 commercial banks to request shorter-term repurchase agreements (repos) and reverse repos, in addition to the instruments it already routinely offers during the open market operations (OMO) it conducts Tuesdays and Thursdays, the central bank announced in a statement Friday, a move which will allow the central bank to act more promptly when it comes to adjusting liquidity, experts told the Global Times Sunday.

The PBC could start carrying out Short-term Liquidity Operations (SLO) from Monday, offering repos and reverse repos with maturity periods less than seven days, according to the bank's statement. Repos and reverse repos, together with longer-term central bank bills, are the instruments most commonly used by the central bank to ensure market liquidity and control short-term money rates. In recent months, the PBC has almost always set the periods of the repos and reverse repos from between 7 days and 28 days.

As a supplement to the routine OMO scheduled for Tuesdays and Thursdays, short-term instruments will be employed to increase the flexibility of OMO when there are temporary fluctuations in the amount of money within the market, the central bank added.

This move underscores just how important OMO have become to China's central bank in terms of monetary policy, Guo Tianyong, director of the Research Center of China Banking at Central University of Finance and Economics, told the Global Times.

The 12 authorized banks - which include the country's four largest State-owned banks and eight medium-sized ones - are now required to hand over their liquidity requests every trading day, the Securities Times reported, citing insiders from State-owned lenders. In the past, the PBC queried 37 primary traders about liquidity demand Mondays and Wednesdays.

Now that the central bank may offer reverse repos more often, it is expected that the PBC will trim the reserve requirement ratio (RRR) for banks less frequently, said Guo.

China's central bank began showing a preference for repos and reverse repos last year, when it phased out central bank bills. "Repos and reverse repos are favored now because they offer more flexibility," Guo explained.

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