On December 14, the interest rates of repo and MLF operations of the People's Bank of China (the PBC) went up slightly by 5 basis points. The Director of the Open Market Operation Division of the PBC accepted an interview by Financial News.
The Director said that, the interest rates in OMO (Open Market Operations), as results of auctions between the central bank and its counter-parties, are market-based. The turn of the year often witnesses strong liquidity needs of the banking system and high bid-to-cover ratio in OMO. The subsequent upward movement of the interest rates has reflected market supply and demand, and is a normal reaction to the recent Fed rate hike. The increase of repo and MLF interest rates this time was below market expectation. Objectively speaking, it will be conducive to reasonable market expectations of the interest rates and help prevent excessive leveraging and expansion of broad credit. It will also play a role in controlling the leverage ratio at the macro level. In fact, from the experiences of the open market operations by Fed and those over the past two decades by the PBC, the bid-winning interest rate has been dynamic most of the time. If the OMO rates failed to fluctuate in accordance with supply and demand, it would result in arbitrage and pricing distortion. The current money market rates are notably higher than the OMO rates, the slight upward movement of the OMO rates will help narrow the spread moderately, ease market distortion, and improve the monetary policy transmission mechanism.
The Director also said that, in view of the increasing liquidity needs of the banking system at the turn of the year, the PBC will flexibly conduct open market operations to meet the reasonable seasonal liquidity needs of the banking system. Since end October, the PBC has provided cross-year fund of RMB 870 billion through 28-day and 2-month repo operations. As the year-end approaches, the PBC will continue to provide cross-year fund through a combination of 7-day and 14-day repo operations. At the same time, in addition to the roll-over of RMB 188 billion MLF on December 6, one-year MLF operation of RMB 288 billion was carried out on December 14. After netting the fund supply of matured operations, the PBC provided RMB 101 billion this month, which is significantly higher than the RMB 8 billion net supply of last month. In addition, the December fiscal factor is expected to contribute a net supply of over RMB 1 trillion. Early next year, the implementation of required reserve ratio cut for inclusive finance is expected to release long-term liquidity of about RMB 300 billion. In view of the 2018 pre-Spring Festival liquidity needs resulting from major commercial banks' massive cash supply, the PBC has made arrangements accordingly. In general, there will be adequate liquidity supply to meet need of the banking system in the upcoming year end and Spring Festival.
