China's central bank boosts liquidity via reverse repos

China's central bank pumped 170 billion yuan ($24.86 billion) into the interbank system Tuesday, via two liquidity tools of reverse repos and fixed term treasury cash deposits.

The People's Bank of China (PBOC) carried out 120 billion yuan of seven-day reverse repos at an interest rate of 2.5 percent. No reverse repos matured Tuesday.

Besides, the PBOC channelled 50 billion yuan of funds into commercial banks via fixed term deposits of commercial banks for central treasury cash management. A reverse repo is a process in which the central bank purchases securities from commercial banks through bidding, with an agreement to sell them back in the future. In this way, commercial banks can raise short-term capital. It is the equivalent of a short-term loan with the securities serving as collateral.

China's treasury cash is held at the PBOC, or the central bank, but commercial banks also look after a part of it in the form of short-term deposits. Eligible commercial banks compete through a tender process for the right to take on the deposits. The two operations were made following Monday's liquidity injection of 180 billion yuan via seven-day reverse repos. The central bank Monday cut the reverse repo rate, a key interbank interest rate, to 2.5 percent from 2.55 percent, the first such cut of its kind since 2015.

Meanwhile, The People's Bank of China, the central bank, lowered a key interbank interest rate, the first such easing in four years as policymakers signaled their intention to enact necessary steps to ensure sufficient liquidity and prop up growth.

The seven-day reverse repurchase rate, a liquidity tool used as an open market operation, was reduced to 2.5 percent from 2.55 percent, the first such cut since October 2015. The central bank also injected 180 billion yuan ($25.74 billion) into the interbank market at the new rate.

Analysts said the move is more of a policy fine-tuning, aimed at strengthening the market's confidence on liquidity, instead of the aggressive stimulus or highprofile monetary easing.

The reverse repurchase rate was lowered two weeks after the PBOC cut the borrowing cost on its medium-term lending facility (MLF) loans?another monetary policy tool indicating the central bank's lending price to commercial banks, by the same margin. It also injected $29 billion of medium-term funds on Friday.

A series of monetary policy operations, especially through coordination of open market and MLF tools, will work together to ensure sufficient liquidity in the financial sector, sending a message that the PBOC is increasing countercyclical adjustments to spur economic growth, said Wen Bin, chief researcher at China Minsheng Bank.

A similar policy stance was evident in the PBOC's third-quarter monetary policy, which was released on Saturday. The report said monetary policy should properly handle the short-term pressure, although the scope for policy maneuvers is limited. The policy should also prevent the spread of inflation expectations.

Monday's cut of the reverse repurchase rate has cheered the bond market, indicated by a more than 0.4 percent increase of delivery of the bench mark 10year treasury futures. However, allowing the interbank interest rate to influence the bank loan rates may be not that easy, said Zhang Xu, an analyst with the Everbright Securities.

"The separation between the interbank market and the bank loan market may reduce the efficiency of the transmission of the monetary policy," he said.

The PBOC plans to release the oneyear loan prime rate (LPR) on Wednesday. The LPR is a newly established bench mark to better indicate the real lending cost to companies. Analysts expect a similar adjustment in LPR.

The rate for the one-year fixing currently stands at 4.2 percent, while the fiveyear rate is 4.85 percent.