China central bank launches forward repo

BEIJING - The People's Bank of China (PBOC, central bank) launched a 14-day forward repurchase operation (repo) at a bid rate of 3.8 percent on Tuesday, which will siphon 48 billion yuan ($7.9 billion) from the money market.

It marked the first time in eight months that the Chinese central bank has issued forward repurchase agreements. A repo is a central bank operation to withdraw funds in the interbank market to prevent excessive liquidity.

Since June of 2013, the PBOC has conducted reverse repos in its regular open market operations to boost liquidity.

Economist Lu Zhengwei of the Industrial Bank said the PBOC's move fell within market expectations.

"It has been a post-holiday routine operation for years following the Chinese New Year," he said.

Plenty of cash has flowed back into the interbank market from individuals following the week-long Chinese New Year, which ended on Feb 6, and there was a notable increase of the funds outstanding for foreign exchange as China's exports surged in January, he said.

The overnight and 7-day Shanghai Interbank Offered Rate (Shibor), a gauge of interbank lending rates, had fallen to a reasonable range, Lu said.

"The operation points to potential excessive liquidity in the interbank market, which doesn't entail any sudden change of the policy bias (by the PBOC)," he added.

In the wake of the PBOC's operation, Chinese shares closed lower on Tuesday with the benchmark Shanghai Composite Index down 0.77 percent, or 16.35 points, to finish at 2,119.07. The smaller Shenzhen Component Index lost 1.4 percent, or 111.49 points, to close at 7,832.47.

China stocks close lower on Tuesday