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PBOC Starts Short-Term Liquidity Operations as Rates Liberalized

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Jan. 19 (Bloomberg) -- The People’s Bank of China said it will start short-term liquidity operations as additional tools to manage cash supply, amid efforts by policy makers to promote liberalization of interest rates.

Repurchase agreements and reverse repurchase contracts with a maturity of less than seven days will be the main tools of the so-called SLOs, the central bank said in a statement yesterday. It named 12 banks, including Industrial & Commercial Bank of China Ltd. and Bank of China Ltd., as participants in the SLOs, which will supplement regular open-market operations held each Tuesday and Thursday. Standard Chartered Plc said the move marks a PBOC shift toward using money-market rates as a policy tool.

“The central bank will probably make the seven-day reverse-repo rate the new benchmark rate in a gradual pace,” said Li Wei, an economist in Shanghai at Standard Chartered. “That means when the economy gets overheated, the central bank will push up the seven-day reverse-repo rate in auctions to guide the market in the price-setting of money rates.”

The shift may improve the government’s ability to manage the world’s second-largest economy, which expanded 7.8 percent in 2012 in the slowest pace in 13 years. The PBOC has issued reverse-repurchase agreements twice weekly since June, and used the contracts to ensure funding availability as it refrained from lowering interest rates. The reverse repos currently issued are maturing in seven, 14 and 28 days.

Ensuring Stability

The purpose of using SLOs is to improve open-market operation and ensure stability in the banking system’s liquidity and money-market rates, according to the statement. The results will be published on the central bank’s website one month after the auctions, the PBOC said.

The central bank, in a June decision announced with the first interest-rate cut since 2008, allowed lenders to offer a 10 percent premium on savings rates and widened permissible lending-rate discounts to 20 percent from 10 percent. The PBOC lowered borrowing costs again on July 6 and widened the lending discount to 30 percent.

The statement didn’t specify when the SLO auctions will be held. Seven-day reverse-repurchase contracts were last sold at a yield of 3.35 percent on Jan. 10.

To contact Bloomberg News staff for this story: Judy Chen in Shanghai at xchen45@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net

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