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

Each Daily reporter｜Zhang Shoulin    Each Daily editor｜Chen Junjie

On April 3, the Shanghai Stock Exchange’s general collateral repurchase reverse repo GC004 closed at 0.965%, with an intraday low of 0.01%. This price is even lower than the overnight term lending rate. On the same day, the Shanghai Stock Exchange’s GC001 hit an intraday low of 0.630%, closed at 0.995% that day, representing a drop of 11.56% from the previous day. The Shenzhen Stock Exchange’s R-001 fell to 0.630% intraday, and closed at 0.975% that day, representing a drop of 11.36% from the previous day.

In fact, if a trade is executed at an annualized return rate of 0.01% and transaction fees are deducted, it turns out to be a loss. But even so, someone is still doing this unprofitable business.

“Previously, I noticed this kind of situation—clients doing this business may not even understand that they are charging transaction fees.” A veteran bond private fund investment professional told a reporter from The Daily Economic News.

GC004 is the 4-day general collateral repurchase reverse repo of the SSE. Based on an annualized return rate of 0.01%, taking the lending of funds on April 3 as an example—since it coincides with a three-day statutory holiday—the actual interest accrual period after lending is 6 days. Therefore, the transaction’s actual investment yield is 0.01%×6/365=0.00016%. Meanwhile, the transaction fee for a securities firm’s GC004 is 0.004%. Accordingly, under the 0.01% price, the investment result is not just unprofitable—it actually results in losses.

With such a low annualized return rate, you would normally give up on the trade. But in reality, this kind of clearly loss-making trade still occurred.

According to the trading screen for GC004 on April 3, near the closing time on that day, starting at 15:27, there were multiple lots executed at the 0.01% price. It wasn’t until close to 15:29 that the price began to rise, and it ultimately closed at 0.965%.

In fact, since April, for several consecutive days, money market prices have been trending downward. The overnight term funds price has now fallen below 1%.

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

As funds prices move lower, it indicates that market funds are relatively abundant. A team led by Mingming, Chief Economist at CITIC Securities, told reporters that entering April, liquidity conditions are quite loose. On the one hand, the end of month-crossing coincides with the bank quarterly liquidity assessment period concluding, leaving liabilities relatively well-stocked. On the other hand, April is often a small month for credit issuance, while the annual special treasury bond issuance plan has not yet been announced, so the “asset shortage” pattern in the bond market continues.

Reporters noted that since early April, as banks’ funding needs decline at the beginning of the month, liquidity in the money market has become even more abundant. As a result, the amount of reverse repo operations under open market operations has been below 1B yuan for consecutive days.

Wang Qing, Chief Macro Analyst at Oriental Jincheng, analyzed that on April 1, the open market conducted 500M yuan of 7-day reverse repo operations, which was the smallest scale recorded since reverse repos were shifted to regular operations in 2015. On that day, there were 78.5B yuan of reverse repo maturities. Based on this, the net amount of funds withdrawn on a single day was 78B yuan.

Wang Qing believes that the reason the PBOC conducted a 7-day reverse repo at the smallest scale in more than 10 years on April 1 was directly because market funding remained continuously steady-to-loose recently, and liquidity was ample as it moved into the beginning of the month. At the same time, this also sent a signal to guide market liquidity stability and to prevent major market interest rates from deviating too far downward from the policy rate, which helps stabilize market expectations.

Overall, Wang Qing pointed out that, mainly due to the central bank’s large-scale net injection of 1.9 trillion yuan of medium-term liquidity through MLF and buyout-style reverse repos in January and February, as well as the relatively low net financing size for March government bonds, the money market has been staying in a steady-to-loose state. Near the end of the month and the quarter-end, the PBOC also increased short-term capital injections through repo collateralized reverse repos, effectively smoothing out fluctuations in liquidity. Wang Qing judged that in the process where the geopolitical situation in the Middle East has driven a sudden rise in external uncertainty, the domestic monetary policy at this stage will have as an important goal maintaining abundant liquidity and stabilizing market expectations. This could be one background for funds at month-end and quarter-end being not tight but looser.

Wang Qing reminded that it is worth noting that during the recent steady-to-loose funding environment, in March the PBOC net withdrew 250 billion yuan of medium-term liquidity, aiming to guide major market interest rates to fluctuate within a reasonable range around the policy rate. As a result, it cannot be ruled out that in April, buyout-style reverse repo operations will continue to be implemented for net withdrawal, and that key market interest rates such as DR007 and the yield on 1-year negotiable certificates of deposit issued by commercial banks (AAA-rated) may stabilize back or even tick up on average.

Wang Qing said that since late February, the geopolitical developments in the Middle East have pushed international oil prices sharply higher, and in March China’s overall price level also showed a strong upward trend. This may also create some disruption to economic growth momentum. In the short term, under a scenario where external uncertainty suddenly rises, while maintaining ample market liquidity, China’s monetary policy would also tilt somewhat toward stabilizing prices in stages, and the timing for rate cuts and reserve requirement ratio cuts could be delayed. In the later period, if external shocks further intensify the disruption to domestic economic growth, monetary policy will correspondingly step up appropriate easing efforts.

Cover image source: Daily Economic News Media Database