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AOFM Weekly Issuance Slate


China Repo Rates Diverge on Friday

--Admits To Domestic Inflation Pressure but See Inflation Expectations Stable
     BEIJING (MNI) - The People's Bank of China's third quarter monetary policy
report released Friday stressed that the central bank will focus on improving
risk prevention while  maintaining stable overall banking system liquidity
     The PBOC's assessment of the world economy in the third quarter generally
remained the same as in the second quarter. Growth prospects have improved while
there remain uncertainties and challenges, especially given the normalization
process of developed countries' monetary policies as well as strong pressure on
investment and consumption growth caused by high debt ratio and high leverage.
     Compared with the second quarter report, the PBOC admitted there may be
upward pressure on domestic inflation due to the government campaigns to cut
excess production capacity and reduce pollution. Still, it said inflation
expectations remain stable, the same comment as the second quarter report.
     The PBOC said it will improve its "two pillar" macro control framework,
which includes monetary policy and macro prudential policies. The report
highlights that asset markets, including real estate, have a natural tendency to
leverage up and so will likely fluctuate pro-cyclically. Macro prudential
policies are needed to adjust the leverage level to maintain financial stability
and prevent systemic risks.
     The third quarter report expanded on the second quarter report to detail
the areas where risks might occur, including corporate debt, asset quality and
bank liquidity, the real estate market, internet finance, cross-border capital
flows, as well as cross-industry and cross-market risks. The PBOC said it will
enhance its monitoring and regulation of those areas.
     The PBOC said he would continue to create a suitable monetary policy
environment for deleveraging while preventing financial risks.
     The PBOC said it would conduct Medium-term Lending Facilities (MLF)
operations once a month to fill medium- to long-term liquidity gaps, caused by
factors such banks' reserve requirement payments.
     The report also emphasized no matter how much and how long the PBOC drained
or injected liquidity into the banking system, the operations would only be
aimed at maintaining overall stable liquidity and should not be interpreted as
any change in the PBOC's monetary policy stance
     It is reasonable for interest rates to fluctuate in the short-term due to
the impact of seasonal or temporary factors, especially in the middle of the
month, the PBOC said. However, financial institutions must not roll over
overnight borrowing to meet long-term liquidity gaps or use short-term money to
leverage up, the PBOC warned, adding that financial institutions need to remain
alert to prevent liquidity risks.
     The PBOC also explained the reasoning for its new 63-day reverse repos,
which it started to use in its open market operations in late October. Because
of large tax payments due in October and large payments for purchases of Chinese
government bonds and local government bonds in October and November, and most of
the liquidity drained by these payments was unlikely to be released back into
the market until mid to late December, the 63-day reverse repos was used to
offset the liquidity impact, the report said. The 63-day reverse repo will also
lower the pressure on the PBOC to roll over short-term reverse repos and, when
they mature, can offset the fiscal spending impact expected at year-end. 
     The goal, the PBOC stressed again, is to maintain stable liquidity
     The 63-day reverse repos can supply cross-quarter and cross-year money in
advance, helping to stabilize market expectations and liquidity conditions, the
PBOC added. Moreover, financial institutions who receive longer-term money will
be more likely to lend longer-term, which can optimize the term structure of
interest rates.
     The PBOC said its open market operations would continue to rely mainly on
its 7-day reverse repos, while flexibly injecting money by using reverse repos
with longer terms to maintain stable liquidity conditions.
--MNI Beijing Bureau; +86 10 85325998; email:
--MNI BEIJING Bureau; +1 202-371-2121; email:
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