As the year is coming to an end, in consideration of commercial banks increased efforts to issue large volume of subordinated debt and solicit deposit, the central bank continues to conduct reverse repurchase operations in order to maintain dynamic balance of the capital surface of the market.
Market analysts believe that, under the current circumstances, market fluidity is still abundant, but there also exist some uncertainties; therefore, the central bank will adopt numerous measures to take initiative regulation and control and promote the "re-balance" of market fluidity. For some time to come, the central bank will continue to rely heavily on reverse repurchase operation, and will make optimized adjustments in such aspects as reverse repurchase scale, varieties, and due time, so as to regulate and control the capital surface of the market more flexibly and accurately.
Loose expectation in the market remains unchanged
On December 18, the central bank carried out RMB 75 billion of reverse repurchase by means of interest bidding. Among this, the transaction volume of 7-day varieties was RMB 20 billion Yuan, and that of 28-day varieties was RMB 55 billion Yuan, with bidding-winning interest of 3.35 percent and 3.60 percent respectively.
That was the central bank's reverse purchase for the 25th week in a row since June 26. For months, the central bank's routine open market businesses, twice every week, have been all about reverse repurchase; meanwhile, the central bank has been optimizing the time limit structure of reverse repurchase, further enhanced the fluidity regulation capability of reverse repurchase tools, and improved the stability of mid- to short-term fluidity in the banking system.
Reverse repurchase refers to transaction behavior in which the central bank purchases marketable securities from primary dealers and promise to sell the marketable securities to the primary dealers in a designated date in the future. Reverse repurchase is the action of the central bank's putting fluidity in the market, and the maturity of reverse repurchase is the action of the central bank's taking back the fluidity from the market
According to statistics, a total of RMB 102 billion Yuan of reverse repurchase in the open market is due this week, a dramatic decrease from the RMB 262 billion Yuan last week, marking the lowest level since the week of August 20. In addition, RMB 26 billion Yuan of central bank bill will be at maturity this week, without any maturity of repurchase. Based on this statistics, without any action by the central bank, there will be a net withdrawn capital of RMB 76 billion Yuan in the open market this week. And after the RMB 75 billion Yuan of reverse repurchase on the 18, there is still RMB 1 billion Yuan of natural net withdrawal this week. Considering that the central bank will have another routine action in the open market on the 20, it is estimated that net issuance into the open market this week is very likely.
Since December, capital surface in the inter-bank market has remained loose. On December 17, the weighted mean interest of overnight and 7-day pledge-style repurchase was 2.2659 percent and 3.0310 percent respectively, without any significant change compared with that on December 14. It is worth mentioning that since December 4, the interest of 7-day reverse repurchase has been running below 3.05 percent.
While continuous reverse repurchases can somewhat stabilize fluidity in the market, issuance of financial deposit in large quantity at the end of the year will also increase capital supply in the market. Judging from past experience, financial deposit in November and December will decrease considerably every year, particularly so in December. According to statistics of last year, release of financial deposition in these two months last year amounted to RMB 1.6056 trillion Yuan, RMB 1.2 trillion Yuan of this happening in December. Analysts predict that release of financial deposit in this December may be expected to increase by 20 percent and the total amount of release may exceed RMB 1.5 trillion Yuan. Therefore, in the short term, the release of financial deposit will be a key tool for maintaining market fluidity in December.
As for funds outstanding for foreign exchange, after the lower-than-expectation statistics in October, funds outstanding for foreign exchange in November again failed to meet market expectation, even that it was reversed. According to latest statistics published by the central bank, funds outstanding for foreign exchange of financial institutions in November was RMB 73.627 billion Yuan less than that in October, a decrease after two streak increases in September and October.
According to Tang Yunfei, chief analyst of the macro strategy team of Founder Security, slowing down of export growth in November may be a main reason for the decrease of funds outstanding for foreign exchange. Besides, trade surplus in November was lower than market expectation, which had somewhat affected funds outstanding for foreign exchange. "The decrease of funds outstanding for foreign exchange after two streak increases does not affect the fluidity of the domestic market". According to Tang Yuanfei, currently, the Shanghai Interbank Offered Rate remains at 2 to 3 percent, and none other interest rates have witnessed significant rise, which is an indication that market fluidity is still abundant.