New PBOC Operations Expands China’s Monetary Policy Toolkit

On 28 October, the People's Bank of China (PBOC) announced the introduction of a new outright reverse repurchasing tool for open market operations. Through this mechanism, the central bank has already injected RMB 500 billion into the banking system in October. The facility will be available to primary dealers and will, in principle, operate once a month, with a maximum duration of one year. The assets eligible for repurchase under this mechanism include sovereign bonds, local government bonds, financial bonds, and corporate credit bonds.

Previously, the PBOC typically relied on tools such as adjustments to the benchmark rate and Loan Prime Rate (LPR), relending and rediscounting facilities, as well as other macroeconomic policy instruments. This year, however, the PBOC also conducted temporary repo and reverse repo operations in July and, in August, executed short-term government bond purchases and sales of longer-term government bonds from primary dealers.

Compared to the traditional reverse repurchasing mechanism, ‘outright reverse repos’ feature longer terms, from one month to a year. Under this arrangement, once the PBOC buys bonds from primary dealers, it assumes full ownership of the securities. This allows the central bank the flexibility to trade these bonds, engage in closed-end repos, and ultimately resell the same quantity and type of bonds to the original repo counterparty.

The PBOC's documentation further explains that this tool will utilise a fixed-quantity, interest-rate bidding process with multi-price bidding, where institutions are selected in descending order of bid rate. Experts indicate that this approach better reflects each institution’s actual demand for liquidity, enhancing the effectiveness of monetary policy tools while providing a strategy to manage the maturity of trillions of RMB in medium-term lending facilities (MLF) at the end of the year.