On November 29, the PBOC issued a number of open market business announcements, including a three-month (91-day) outright reverse repurchase operation of 800 billion yuan in November, which was the second time that the PBOC adopted a new monetary instrument this year; At the same time, the central bank also announced that the net purchase of treasury bonds with a face value of 200 billion yuan in November and the reverse repurchase operation of 479 billion yuan was carried out on November 29.

The central bank launched the outright reverse repurchase business for the second time this year

On the evening of November 29, the People's Bank of China issued an announcement that in order to maintain reasonable and sufficient liquidity in the banking system, in November 2024, a three-month (91-day) buyout reverse repurchase operation of 800 billion yuan was launched in the form of fixed quantity, interest rate bidding and multiple price winning bids. This is the second time this year that the central bank has carried out such operations.

Outright reverse repo is a new monetary policy tool launched by the central bank. On October 28 this year, the People's Bank of China announced the launch of this tool, aiming to further enrich the monetary policy toolbox. The tool is operated by primary dealers of open market operations, and in principle is carried out once a month for a period of no more than one year.

Subsequently, on October 31, the central bank carried out the buyout reverse repurchase operation for the first time, and carried out a 6-month (182-day) operation of 500 billion yuan in the form of fixed quantity, interest rate bidding, and multiple price winning bids.

The "monthly" buy-out reverse repo operation may be intended to coincide with the gradual reduction of the number of medium-term lending facilities (MLFs). The adoption of the method of "fixed quantity, interest rate bidding, and multiple price points to win bids" indicates that its main purpose is to provide liquidity, rather than to assume the role of policy interest rate. Unlike pledged repo, the ownership of the bond in the outright repo changes substantially during the trading period, during which the central bank has the ownership and use rights of the corresponding bond, which helps to improve the liquidity of the underlying bond.

For the stock market: The buy-out reverse repo increases the scale of bonds held by the central bank, so that it can provide more treasury bonds to non-bank financial institutions through swap facilities in the future, thereby expanding the scale of SFISF (financing support tool for securities finance companies), which is conducive to increasing the incremental capital inflow of the stock market.

For the bond market: The enrichment of the central bank's toolbox makes the single instrument more flexible, and the central bank has less concerns about injecting liquidity. In the future, in the face of extreme government bond supply, the central bank's liquidity injection will be more flexible and accurate, which will help smooth out the fluctuation of the capital side and contribute to the stability of the bond market.

In November, the net purchase of government bonds was 200 billion yuan

On the evening of November 29, the People's Bank of China issued an announcement that in order to increase the countercyclical adjustment of monetary policy and maintain reasonable and sufficient liquidity in the banking system, the People's Bank of China launched an open market treasury bond trading operation in November 2024, with a net purchase of bonds with a face value of 200 billion yuan throughout the month.

Month-end liquidity management

On the morning of the same day, the People's Bank of China also issued another announcement on open market business transactions. According to the announcement, in order to maintain reasonable and sufficient liquidity in the banking system at the end of the month, on November 29, 2024, the People's Bank of China launched a 7-day reverse repurchase operation of 479 billion yuan in the form of fixed interest rate and quantity bidding, with an operating interest rate of 1.50%. Through these operations, the central bank will ensure that the banking system has sufficient liquidity at the end of the month to support the stable operation of financial markets.

Ensure that the liquidity of the banking system is reasonable and sufficient

At present, a large number of high-quality bond assets are pledged in the process of MLF operation, resulting in a lack of liquidity in the interbank bond market. By replacing MLF in large quantities through outright reverse repo operations, the pledged frozen bonds can be converted into tradable bonds in the open market, thereby greatly improving the liquidity of the interbank bond market.

The outright reverse repo operation will expire in late February 2025, which will help iron out the fluctuations in the capital side during the New Year's Eve and Spring Festival holidays. Before the Spring Festival, the scale of cash injection and tax payment is large, and there has always been a large liquidity gap. The central bank's outright reverse repo operations in October and November fully covered the demand for liquidity during the Spring Festival.

Since November, local governments have begun to issue special refinancing bonds for the purpose of "replacing existing implicit debts", and the disruption of the liquidity of the banking system caused by the centralized supply of government bonds has attracted the attention of market institutions. According to the arrangement of the Ministry of Finance, the quota of 2 trillion yuan of local government bonds should be used to replace the stock of implicit debt in 2024. In addition, the Ministry of Finance will also issue a part of the new special bond limit for 2025 within the year, with a theoretical issuance limit of 2.34 trillion yuan.

The increase in the supply of local government bonds in a short period of time will cause disruption to the funding side and capital expectations. In the process of the "package of incremental policies", monetary policy will pay more attention to maintaining market liquidity in a reasonable and abundant state, so as to provide a favorable monetary and financial environment for the recovery of economic growth momentum. It is expected that the PBOC will inject medium- and long-term liquidity into the market in a timely manner through RRR cuts, open market trading of treasury bonds, and outright reverse repurchase operations, and cooperate with the smooth issuance of local government bonds.

Pan Gongsheng, governor of the central bank, said at the Financial Street Forum that it is expected to further cut the reserve requirement ratio by 0.25 to 0.5 percentage points depending on the market liquidity situation by the end of the year. Considering the concentrated supply of local government bonds in December and the high scale of MLF maturity in that month reached a high of 1.45 trillion yuan, experts believe that the probability of the central bank cutting the reserve requirement ratio in the near future is increasing.