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, Shanghai Stock Exchange’s GC004 generic collateralized reverse repo closed at 0.965%, with a low of 0.01% during the day. This price was even lower than the overnight term interest rate. That day, Shanghai Stock Exchange’s GC001 hit a low of 0.630% during the day, closed at 0.995%, a decline of 11.56% from the previous day. Shenzhen Stock Exchange’s R-001 fell to 0.630% during the day, and closed at 0.975%, a decline of 11.36% from the previous day.

In fact, if the trade is executed at an annualized yield price of 0.01%, after deducting transaction fees, it ends up being a loss instead of a gain. But even so, there are still people making this money-losing deal.

“Before, I noticed this kind of situation—maybe the customers doing this business simply don’t understand the way they pay transaction fees.” A veteran bond private fund investment professional told the reporter from The Daily Economic News.

Overnight term generic collateralized reverse repo closing price falls below 1%

GC004 is the 4-day term generic collateralized reverse repo of the SSE. Based on an annualized yield of 0.01% and using April 3 as an example for borrowing funds, because it coincided with a three-day statutory holiday, the actual interest-bearing days after borrowing are 6 days. Therefore, the actual investment yield of this transaction is 0.01%×6/365 = 0.00016%. Meanwhile, a certain securities firm’s GC004 transaction fee is 0.004%. Accordingly, the investment result at a 0.01% price is not profitable—it results in paying out.

With such a low annualized yield, trading is usually abandoned. But in reality, just such loss-making trades happen to appear.

According to the intraday trading situation for April 3 GC004, in the minutes close to the close—starting at 15:27—there were multiple lots of trades executed at the 0.01% price. The price then began to rise only around 15:29, and ultimately it closed at 0.965%.

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

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

As the funds price declines, it signals that market liquidity is relatively abundant. Mingming Team, chief economist at CITIC Securities, told the reporter that entering April, the liquidity conditions are quite loose. On the one hand, funds are ending cross-month positions, together with banks’ quarterly liquidity assessment concluding; liabilities are relatively abundant. On the other hand, April is often a small month for credit, while the full-year special treasury issuance plan has not yet been announced; the “asset shortage” pattern in the bond market continues.

Public market operations show the smallest scale since records began

The reporter noted that since entering April, as banks’ funding demand at the beginning of the month declines, liquidity in the funds market has become even more abundant, and reverse repo operation volumes in public market operations have been consistently below 1B yuan.

Wang Qing, chief macro analyst at Orient Securities, analyzed that on April 1, the central bank conducted a 500M yuan 7-day reverse repo, which is the smallest scale on record since reverse repos were switched to regular operations in 2015. On the same day, 78.5B yuan of reverse repo matured; based on this, the net amount of reverse repo drained on a single day was 78B yuan.

Wang Qing believes that on April 1, the central bank carried out the smallest-scale 7-day reverse repo in more than 10 years. The direct reason was that money market conditions have been steadily but somewhat loose in recent days, along with liquidity moving wider at the start of the month. At the same time, this also signaled guidance to keep market liquidity stable and prevent key market interest rates from deviating downward excessively from the policy rate, helping 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 mid-term liquidity through MLF and outright reverse repos over 1–2 months, as well as the relatively low net financing scale of government bonds in March, money market liquidity has continued to be stable but somewhat loose recently. Near month-end and quarter-end, the central bank increased short-term funding injections via collateralized reverse repos, which also effectively dampened fluctuations in liquidity. Wang Qing judged that amid the rapid rise in external uncertainty triggered by developments in the Middle East, an important goal of China’s current monetary policy is to maintain abundant liquidity and stabilize market expectations. This may be a background factor behind the fact that at month-end and quarter-end, liquidity is not tight but instead becomes looser.

Wang Qing reminded that it is worth noting that during the recent period of stable but somewhat loose liquidity, the central bank net drained 250 billion yuan of mid-term liquidity in March, aiming to guide major market interest rates to fluctuate around policy rates within a reasonable range. As a result, it is not excluded that in April, outright reverse repos will continue to be implemented for net drainage, and that major market interest rates such as DR007 and the maturity yields of 1-year commercial bank (AAA-rated) negotiable certificates of deposit may rebound or rise slightly on average.

Wang Qing said that since late February, developments in the Middle East have pushed international oil prices sharply higher, and in March, China’s overall price level showed a strong upward trend. This will also create some disruption to economic growth momentum. In the short term, with external uncertainty suddenly rising, while maintaining ample market liquidity, China’s monetary policy may also, in stages, tilt toward stabilizing prices. The timing for interest-rate cuts and reserve-ratio cuts may therefore be delayed. If later external shocks further increase disruptions to domestic economic growth, monetary policy will appropriately step up its level of easing.

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