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

The Securities Daily reporter | Zhang Shoulin    The Securities Daily editor | Chen Junjie

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

In fact, if the trade is executed at the annualized yield price of 0.01% and you deduct the transaction fees, it actually results in a loss. But even so, someone is still doing this loss-making business.

“I had noticed this kind of situation before—maybe the clients doing this business simply don’t understand transaction fees,” a veteran bond private fund investment professional told The Securities Daily reporter.

Overnight term general collateralized reverse repurchase closing price falls below 1%

GC004 is the SSE 4-day term general collateralized reverse repurchase. Based on an annualized yield of 0.01%, taking the funds lent on April 3 as an example: since it coincided with three-day legal holidays, the actual interest-accruing days after lending are 6 days, so the realized investment yield rate for this transaction is 0.01%×6/365=0.00016%. Meanwhile, the transaction fee for a certain broker’s GC004 is 0.004%. Based on this, the investment result under the 0.01% price is not profitable—it’s a loss.

With such a low annualized yield, trading is usually abandoned. But in reality, exactly this kind of clearly loss-making trade still occurs.

Based on the trading board for GC004 on April 3, close to the market close, 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 several consecutive days, money market rates have been trending downward; the overnight term funding rate has now fallen below 1%.

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

As funding prices move lower, it indicates that market funding is relatively abundant. Mingming Team, Chief Economist at CITIC Securities, told reporters that entering April, the availability of funds is quite loose. On the one hand, cross-month demand ended, along with the completion of the banks’ quarterly liquidity assessment; liabilities are relatively abundant. On the other hand, April is often a “credit small month,” and the planned issuance of special treasury bonds for the full year has not yet been announced—thus the “asset shortage” pattern in the bond market continues.

Open market operations reach the smallest scale since records began

Reporters noticed that since the beginning of April, as banks’ funding demand declines at the start of the month, liquidity in the money market has become even looser. As a result, the reverse repo operation volume in open market operations has remained below 1B yuan for several consecutive days.

Wang Qing, Chief Macro Analyst at Oriental Jincheng, analyzed that on April 1, the PBOC conducted a 500M yuan, 7-day reverse repo. This is the smallest scale since reverse repos were shifted to regular operations in 2015, based on records. On that day, 78.5B yuan of reverse repos matured; therefore, calculated net drainage for the day was 78B yuan.

Wang Qing believes that on April 1, the PBOC carried out the smallest 7-day reverse repo in over 10 years. The direct reason was that funds have recently been steadily but slightly loose, and also that liquidity was loose after the beginning of the month. Meanwhile, this also signaled to guide market liquidity to stay stable, and to avoid major market rates deviating too far downward from the policy rate, which helps stabilize market expectations.

Overall, Wang Qing pointed out that, mainly due to the PBOC’s large-scale net liquidity injection of 1.9 trillion yuan in the medium-term using MLF and buyout-style reverse repos during January to February, and the relatively low net financing scale of government bonds in March, liquidity has been continuously steady but slightly loose recently. Near the end of the month and at quarter-end, the PBOC increases short-term funding injections via repo-repurchase with collateral, which also effectively dampens fluctuations in liquidity. Wang Qing judges that during the process in which changes in the Middle East situation have sharply raised external uncertainty, at this stage China’s monetary policy will keep liquidity sufficiently abundant and stabilize market expectations as important goals. This may be a background factor for funding being not tight but actually looser around month-end and quarter-end.

Wang Qing reminded that it is worth noting that during the recent period of steady but slightly loose liquidity, the PBOC’s net drawdown of 250 billion yuan in medium-term liquidity in March aimed to guide key market rates to fluctuate within a reasonable range around the policy rate. Therefore, it is not excluded that the buyout-style reverse repos in April will continue to be implemented with net drainage, and that key market rates such as the DR007 and the 1-year certificates of deposit of commercial banks (AAA-rated) could revert to or rise slightly from their averages upon maturity.

Wang Qing said that since late February, developments in the Middle East situation have driven international oil prices sharply higher, and in March China’s overall price level showed a strong upward trend. This may also create some disruption to economic growth momentum. In the short term, amid a sudden rise in external uncertainty, while maintaining sufficient market liquidity, China’s monetary policy may also temporarily tilt toward stabilizing prices, and the timing of interest rate cuts and reserve requirement cuts may be delayed. If later external shocks further disrupt domestic economic growth, monetary policy will correspondingly increase the力度 of appropriately accommodative measures.

Cover image source: The Securities Daily media resource bank