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 Collateralized Reverse Repo GC004 closed at 0.965%, with the intraday low reaching as low as 0.01%. This price was even lower than the overnight term interest rate. On the same day, the Shanghai Stock Exchange’s GC001 hit a intraday low of 0.630% and closed at 0.995%, a decline of 11.56% from the previous day. The Shenzhen Stock Exchange’s R-001 fell to a intraday low of 0.630% and closed at 0.975% on the day, down 11.36% from the previous day.

In fact, if a trade is executed at an annualized yield price of 0.01%, after deducting transaction fees, it turns out to be a loss rather than a gain. But even so, people are still doing this loss-making business.

“Previously, I found that there might be such a situation—perhaps customers doing this business don’t even understand how the fee is charged.” A senior bond private fund investment professional told the reporter from The Daily Economic News.

Overnight term General Collateralized Reverse Repo closing price falls below 1%

GC004 is the Shanghai Stock Exchange’s 4-day General Collateralized Reverse Repo. Using the annualized yield of 0.01% as an example, with the funds lent on April 3, because it coincided with a three-day statutory holiday, the actual interest-accruing days after the funds are lent are 6 days. Therefore, the actual investment yield rate for this transaction is 0.01%×6/365=0.00016%. Moreover, a certain broker’s transaction fee for GC004 is 0.004%. Based on this, at a price of 0.01%, the investment outcome is not profitable—it ends up costing money.

With such a low annualized yield, it is usually natural to give up on trading. But in reality, precisely this kind of loss-making trade still occurs.

Judging from the order book trading situation for April 3’s GC004, near the close on that day, starting at 15:27, there were multiple lots of trades executed at the 0.01% price. Until around 15:29, the price began to rise, and it ultimately closed at 0.965%.

In fact, since April, over several consecutive days, money market prices have been trending downward. The overnight term funding rate is currently already below 1%.

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

As funding prices move lower, it indicates that market funding is relatively abundant. Mingming Team, Chief Economist at CITIC Securities, told the reporter that entering April, liquidity conditions are quite loose. On the one hand, month-crossing funding requirements end and, combined with banks’ quarterly liquidity assessment coming to a stage, liabilities are relatively well supplied. On the other hand, April is often a small month for credit, while the annual plan for special national bond issuance has not yet been announced, so the “asset shortage” situation in the bond market continues.

Open market operations see the smallest scale since records began

The reporter noted that since early April, as bank funding demand declines at the beginning of the month, liquidity in the funding market has become even more abundant. Reverse repo operation volumes in open market operations have remained below 1B yuan for consecutive days.

Wang Qing, Chief Macro Analyst at Oriental Jinceng, analyzed that on April 1, the People’s Bank of China conducted a 500M yuan, 7-day reverse repo under open market operations. This was the smallest scale recorded since reverse repos were converted into regular operations in 2015. On the same day, 78.5B yuan of reverse repos matured. Based on this calculation, the net reverse repo cash withdrawal on a single day was 78B yuan.

Wang Qing judged that on April 1, the central bank conducted the smallest-scale 7-day reverse repo in more than 10 years. The direct reason was that funding conditions have been continuously steady-to-loose in recent days, and liquidity tends to be loose moving into the early month. At the same time, it also signaled an intention to guide market liquidity stability and 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 affected by the central bank’s large-scale net injection of 1.9 trillion yuan of medium-term liquidity in January to February through the use of MLF and buyout-style reverse repos, and the relatively low net financing size of government bonds in March, recent funding conditions have been continuously steady-to-loose. Near the end of the month and quarter-end, the central bank also increased short-term funding injections via collateralized reverse repos, which effectively smoothed out fluctuations in funding conditions. Wang Qing judged that amid a sudden rise in external uncertainty driven by developments in the Middle East situation, at this stage, domestic monetary policy will have as an important goal maintaining ample liquidity and stabilizing market expectations. This may be a background factor for funding conditions to be not tight but rather looser at month-end and quarter-end.

Wang Qing reminded that what is worth noting is that during the recent period of steady-to-loose funding conditions, in March the central bank 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. Therefore, it is not ruled out that in April, buyout-style reverse repos will continue to be implemented for net withdrawals, and that key market interest rates such as the DR007 and the maturity yields of 1-year commercial bank (AAA-rated) negotiable certificates of deposit may stabilize back to or rise slightly from their averages.

Wang Qing said that since late February, developments in the Middle East have driven a sharp surge in international oil prices, and in March, the overall level of domestic prices showed a strong upward trend. This could also create some disturbance to economic growth momentum. In the short term, amid a sudden increase in external uncertainty, domestic monetary policy, while maintaining ample market liquidity, will also, in phases, tilt toward stabilizing prices. The timing for interest rate cuts and reserve requirement ratio cuts may be postponed. Later, if external shocks further intensify their disturbance to domestic economic growth, monetary policy will correspondingly increase the力度 of moderate easing.

Cover image source: Each Daily Media Materials Database