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China central bank says 14-day reverse repos gives market flexibility

People's Bank of China building.
VCG | Getty Images
People's Bank of China building.

A decision by China's central bank to reintroduce 14-day reverse repos this week after a six-month hiatus will give markets more flexibility, a leading bank official said on Friday, as talk swirled over whether there has been a policy shift.

The People's Bank of China (PBOC) also will continue issuing 7-day reverse repos, and there are signs that its interest rate was following the policy interest rates, central bank vice governor Yi Gang said at a forum in Beijing.

He added that both 7-day and 14-day reverse repos provide ample liquidity for the market.

China's central bank has urged banks to spread out the tenors of their loans, hinting at its displeasure with a recent trend of banks focusing on overnight lending, banking sources told Reuters on Thursday.

Traders fear some smaller banks may be using short-term borrowing to speculate in bond markets.

To take the lead to encourage banks to lend for longer periods of time, the central bank injected cash into money markets through 14-day reverse repo agreements for the first time since February on Wednesday, in addition to employing its typical tool the seven-day reverse repo.

It made similar injections on Thursday and Friday, bringing the weekly open markets net injection to 310 billion yuan ($46.54 billion).

Analysts say the change in tactics by the central bank, which for most of 2016 has relied on lower interest rate seven-day reverse repos to maintain money market liquidity, signals the PBOC's concern that too much cheap money market borrowing is flowing into bonds and other assets.

On Friday the volume weighted average of the seven-day repo rate was at 2.36 percent by early afternoon, down 13 basis points from Thursday's average closing rate.

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