On October 31, the "Open Market Business" column of the official website of the People's Bank of China released the first open market buyout reverse repurchase business announcement, saying that in order to maintain reasonable and sufficient liquidity in the banking system, in October 2024, the central bank carried out a 6-month buyout reverse repurchase operation of 500 billion yuan in the form of fixed quantity, interest rate bidding and multiple price winning bids, realizing the efficient landing after the creation of the tool.

|Added a 6-month reverse repo operation to ensure sufficient liquidity before and after the Spring Festival

According to CCTV News, the People's Bank of China has recently adopted new liquidity management measures, adding an additional 6-month reverse repurchase operation on the basis of the daily routine 7-day reverse repurchase operation, aiming to ensure the adequacy and rationality of short-term, medium-term and long-term capital liquidity, reflecting the central bank's determination to continue to implement supportive monetary policy. Experts believe that these new liquidity will continue to play a role at the end of the year and on the eve of the Spring Festival, helping to maintain the stability and smooth transition of the market's capital side.

The 6-month reverse repo operation is cleverly designed, which can cross the liquidity fluctuations during the special period of the Spring Festival, and avoid the liquidity pressure that may be brought about by the expiration of the 3-month reverse repo before the Spring Festival. In contrast, this longer operation can continue until late April of the following year, effectively covering the impact of the Spring Festival holiday. In addition, according to the PBOC's announcement, the maximum maturity of such reverse repo operations is one year, which fills the gap between the current 7-day reverse repo and the one-year medium-term lending facility (MLF), further enriching the central bank's liquidity management toolbox.

Experts point out that the period around the Chinese New Year is usually accompanied by large-scale cash handouts and tax payment activities, which can lead to significant liquidity shortages. By implementing a six-month reverse repo operation, the central bank will not only be able to provide necessary liquidity support, but also effectively respond to the special needs during the Spring Festival and reduce liquidity pressure in January. This new move shows that the central bank is actively taking measures to ensure that there is sufficient capital circulation within the financial system to promote the sound and healthy development of the economy.

The multi-price bid-winning mechanism strengthens the authenticity of capital demand

In its latest statement, the central bank did not disclose the specific interest rate for the outright reverse repo operation. However, securities analysts pointed out that the effect of this 500 billion yuan liquidity injection is equivalent to a 25 basis point reduction in the bank reserve ratio, thereby freeing up more funds for bank loans. However, analysts also mentioned that the cost of funds obtained in this way will be higher than the funds released by reducing the reserve requirement ratio.

According to the central bank's earlier announcement, the outright reverse repurchase adopted a fixed amount, interest rate bidding, and multi-price bidding. This means that the financial institutions involved in this operation need to choose different interest rates according to their actual conditions during the bidding process, and the final winning interest rate is the interest rate quoted at the time of bidding. As a result, each participating institution may have multiple winning bids, and the winning interest rate of each transaction may be different, and the whole operation process will not result in a uniform winning interest rate.

This mechanism is designed to more accurately reflect the actual funding needs of financial institutions, effectively preventing the possible 'free-rider' phenomenon in the bidding process, where some institutions try to use other people's bids to obtain a lower cost of capital. At the same time, instead of introducing a new policy rate, such an arrangement strengthens the position of the 7-day reverse repo operation rate as the main policy rate, maintaining the consistency and consistency of monetary policy.

At its core, it is still a treasury business

The introduction of the outright reverse repo is to enhance the liquidity, security and internationalization of the interbank market by realizing the transfer of bond collateral. Compared with the traditional pledged reverse repo, the biggest difference between the buyout reverse repo launched by the central bank this time is that the bonds used as collateral will be transferred from the account of the capital investor to the account of the financing party, rather than just being frozen in the original account. According to CCTV News, this change will help activate a large number of bond assets, ensure the safety of central bank funds in extreme cases, and promote the development of outright repo business throughout the market.

It is important to note that although the ownership of the bonds has been transferred, this does not mean that the items on the balance sheet will change with them, and the core is still a treasury business.

The central bank's accounting treatment when executing outright reverse repo is consistent with other outright repo transactions in the market, i.e., adding a record of claims to primary dealers on the asset side of the central bank, rather than directly recording them as bond assets. This is similar to the treatment of 7-day reverse repo and medium-term lending facility (MLF), emphasizing that the essence of outright reverse repo is capital operation.

In addition, during the validity period of the buyout repo, the interest generated by the bond collateral will be returned to the primary dealer, so as to avoid the difference in bond coupon and affect the pricing of the outright reverse repo, ensuring the fairness and transparency of the market.

In October, the central bank launched a 500 billion yuan buyout reverse repurchase operation to inject an equal amount of liquidity into primary dealers. In Jingtai's view, in the short term, this kind of operation, combined with swap facilitation measures, is more likely to bring incremental funds to the stock market, which has a positive impact on the stock market. However, in the medium to long term, the fundamental factors of the market are still at the core of determining the direction of the market, so it is necessary to pay close attention to the strength of fiscal policy and its actual implementation.

In view of the frequent switching of hot spots in the current capital market, for investors, in the short term, they can consider biasing towards dividend strategies or broad-based indices in their investment allocation to cope with the rapidly changing market environment.