Shanghai Stock Exchange general pledge-style reverse repurchase GC004 intraday as low as 0.01% Industry: Funds are quite ample entering April

By Economic Daily Reporter | Zhang Shoulin    By Economic Daily Editor | Chen Junjie

On April 3, the Shanghai Stock Exchange’s GC004 generic collateralized reverse repurchase with an overnight tenor closed at 0.965%, with an intraday low of 0.01%. This price was even lower than the overnight tenor interbank offered rate. That day, the Shanghai Stock Exchange’s GC001 hit an intraday low of 0.630%, closed at 0.995%, a decline of 11.56% from the previous day. The Shenzhen Stock Exchange’s R-001 fell to an intraday low of 0.630%, closed at 0.975%, a decline of 11.36% from the previous day.

In fact, at an annualized yield of 0.01% and given the trade price, after deducting transaction fees, it turns out to be a loss. But even with this money-losing deal, someone is still doing it.

“Earlier I noticed this kind of situation—clients doing this business probably don’t even understand that they’re charging transaction fees.” A senior bond private fund investment professional told Economic Daily.

The closing rate for overnight tenor generic collateralized reverse repos fell below 1%

GC004 is the Shanghai Stock Exchange’s 4-day generic collateralized reverse repo. Using an annualized yield of 0.01% as an example, for the funds lent out on April 3, because it coincided with a three-day statutory holiday, the actual interest-accrual days after lending were 6 days. Therefore, the transaction’s actual investment yield was 0.01%×6/365=0.00016%. Meanwhile, a brokerage’s transaction fee for GC004 was 0.004%. Based on this, at a trade price under 0.01%, the result is not profitable—it is a loss.

With such a low annualized yield, one would normally give up on trading. But precisely this kind of trade that is clearly losing did occur.

According to the trading screen data for April 3’s GC004, on that day, close to the end of trading, starting at 15:27, multiple trades were executed at the 0.01% price. Until around 15:29, the price began to rise; it ultimately closed at 0.965%.

In fact, since April, in consecutive days the money market rates have been trending downward, and the overnight tenor funding rate has now fallen below 1%.

On April 3, GC001 closed at 0.995%, after closing the previous day at 1.125%. On April 3, R-001 closed at 0.975%, after closing the previous day at 1.1%.

With funding rates falling, it indicates that market funding is relatively abundant. Mingming team, Chief Economist at CITIC Securities, told reporters that entering April, the funding environment has been quite loose. On the one hand, cross-month funding has ended and, on top of that, the banks’ quarterly liquidity assessment has come to a close, leaving liabilities relatively ample. On the other hand, April is often a “small credit month,” and the planned issuance of special treasury bills for the year has not yet been announced; the “asset shortage” situation in the bond market therefore continues.

The open market business reached the smallest scale since records began

The reporter noted that since entering April, as banks’ initial-month demand for funds declines, liquidity in the money market has become even more abundant. Reverse repo operations in open market operations have stayed below 1B yuan for consecutive days.

Wang Qing, Chief Macro Analyst at Orient Securities, analyzed that on April 1, the open market conducted a 500M yuan, 7-day reverse repo. This was the smallest scale on record since reverse repos were switched to regular operations in 2015. On that day, there were 78.5B yuan of reverse repo maturities due, so the calculation implies a net withdrawal of 78B yuan in a single day.

Wang Qing judged that the reason the central bank conducted a 7-day reverse repo at the smallest scale in over 10 years on April 1 was directly because funding has been continuously stable-to-loose recently, and additionally because liquidity had eased into the wider side at the beginning of the month. At the same time, this also sends a signal to guide the market liquidity to remain stable, preventing key market rates from deviating downward excessively from the policy rate, which helps stabilize market expectations.

Overall, Wang Qing pointed out that, mainly affected by the central bank’s large-scale net injection of 1.9 trillion yuan of medium-term liquidity via MLF and outright buy-and-sell reverse repos during January to February, as well as the relatively low net financing scale of government bonds in March, funding has remained in a stable-to-loose state recently. Near month-end and quarter-end, the central bank also increases short-term capital injections through collateralized reverse repos, which effectively dampens fluctuations in funding. Wang Qing believes that amid a sharp rise in external uncertainty driven by developments in the Middle East situation, at this stage China’s monetary policy will keep liquidity ample and stabilize market expectations as important goals. This may be one backdrop for month-end and quarter-end funding being not tight but actually looser.

Wang Qing reminded that it is worth noting that, during the recent stable-to-loose funding environment, in March the central bank had a net liquidity withdrawal of 250 billion yuan of medium-term liquidity, aiming to guide major market rates to fluctuate within a reasonable range around the policy rate. As a result, it cannot be ruled out that in April the outright buy-and-sell reverse repo will continue to be implemented as a net withdrawal, and the averages of key market rates such as DR007 and the yield to maturity of 1-year commercial bank (AAA-rated) negotiable certificates of deposit may rebound or rise slightly.

Wang Qing said that since late February, developments in the Middle East have pushed international oil prices significantly higher, and in March China’s overall price level has shown a stronger upward trend. This would also create some disruption to the growth momentum of the economy. In the short term, amid a sudden rise in external uncertainty, while maintaining ample market liquidity, China’s monetary policy may also, in stages, tilt toward stabilizing prices. The timing for rate cuts and reserve requirement cuts could therefore be delayed. If later external shocks intensify their disruption to domestic economic growth, monetary policy will correspondingly increase an appropriate level of loosening.

Cover image source: Economic Daily Media Resource Library