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(Yicai) Oct. 28 -- The People's Bank of China introduced open market outright reverse repurchase operations today, a new monetary policy tool to help the central bank maintain reasonable liquidity in the financial system.
Outright reverse repo operations use a fixed-quantity, interest-rate bidding process with multiple winning price levels, the PBOC announced on its website. They will be limited to primary dealers in the open market and generally occur once a month, with terms of up to one year.
Institutions will be able to bid with different interest rates based on their own needs, and winning bids will be awarded in descending order, a person close to the PBOC told Yicai, with the winning rates corresponding to those the institutions offered.
Outright reverse repos will also reduce the free-riding behavior of institutions in rate bidding and more accurately reflect their funding needs, the person added.
The new tool will enable the PBOC to better support credit flow as medium-term loans expire at the end of the year, according to an expert. Data from Wind Information show that CNY1.45 trillion (USD203.3 billion) of these loans will mature in November and in December.
Outright reverse repos not only deepen the PBOC's toolkit, but also set an example for the development of the business in the market, the expert noted. That will help to ease the pressure on financial institutions from regulatory requirements on collateral freezes, further enhancing liquidity, security, and the internationalization of the interbank market, they added.
Editors: Liao Shumin, Futura Costaglione