On April 3, the Shanghai Stock Exchange general pledge-style reverse repurchase GC004 closed at 0.965%, with a low of 0.01% during the trading day. This price was even lower than the overnight interest rate. On the same day, the Shanghai Stock Exchange GC001 traded as low as 0.630% during the day and closed at 0.995%, down 11.56% from the previous day. Shenzhen Stock Exchange R-001 traded as low as 0.630% during the day and closed at 0.975%, down 11.36% from the previous day.

In fact, based on an annualized yield of 0.01% and transaction prices, after deducting trading fees, it results in a loss. Yet, people are still engaging in this unprofitable business.

“I’ve noticed this situation before; it’s probably clients doing this business who simply don’t understand how to collect fees,” a senior bond private equity investor told the Daily Economic News.

Overnight general pledge-style reverse repurchase closing prices fall below 1%

GC004 is a 4-day general pledge-style reverse repurchase on the Shanghai Stock Exchange. Based on an annualized return of 0.01%, taking the April 3rd lending as an example, due to a three-day statutory holiday, the actual interest calculation period is 6 days. Therefore, the actual investment return is 0.01%×6/365=0.00016%. A certain brokerage’s GC004 transaction fee is 0.004%. Based on this, the investment result at a 0.01% price is a loss rather than a profit.

Faced with such a low annualized return, traders usually choose to abandon the trade. But in reality, such clearly unprofitable trades still occur.

According to the trading situation of GC004 on April 3, near the close, starting at 15:27, multiple trades were executed at 0.01%, and until about 15:29, the price began to rise, finally closing at 0.965%.

In fact, since April, the prices in the money market have been trending downward for several days, and the overnight funding rates have now fallen below 1%.

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

Falling funding prices indicate that market liquidity is relatively abundant. CITIC Securities’ chief economist Mingming’s team told reporters that in April, liquidity has been quite loose. On one hand, funds cross-month end, and combined with the conclusion of bank quarterly liquidity assessments, liabilities are relatively ample; on the other hand, April is often a small month for credit, and the full-year special treasury bond issuance plan has not yet been announced, so the bond market remains in a state of asset scarcity.

The scale of open market operations has been the smallest since records began

The reporter notes that since April, as bank funding needs decreased at the start of the month, liquidity in the money market has become even more ample, with reverse repurchase operations in the open market falling below 1 billion yuan for consecutive days.

Wang Qing, chief macro analyst at Orient Securities, analyzed that on April 1, the open market conducted a 500M yuan 7-day reverse repurchase, which is the smallest scale since 2015 when reverse repos became routine. On that day, 78.5 billion yuan of reverse repos matured, resulting in a net withdrawal of 78 billion yuan.

Wang Qing believes that the reason for the smallest-scale 7-day reverse repurchase in over ten years on April 1 is that recent liquidity has remained stable and slightly loose, coupled with the liquidity at the beginning of the month being ample. This also signals to the market that liquidity should be kept stable and that major market interest rates should not deviate excessively downward from policy rates, helping to stabilize market expectations.

Overall, Wang Qing pointed out that the recent stable and slightly loose liquidity situation is mainly due to the central bank’s large-scale net injection of 1.9 trillion yuan through the combined use of MLF and outright reverse repos in January and February, and the relatively low net financing scale of government bonds in March. Recently, liquidity has remained stable and slightly loose; approaching month-end and quarter-end, the central bank has increased short-term liquidity injections through pledge-style reverse repos, effectively smoothing liquidity fluctuations. Wang Qing believes that amid the sudden escalation of external uncertainties caused by evolving Middle East tensions, the current domestic monetary policy aims to maintain ample liquidity and stabilize market expectations. This may explain why liquidity is not tight but rather easing toward month-end and quarter-end.

Wang Qing reminds that it is worth noting that during the recent period of stable and slightly loose liquidity, the central bank withdrew 250 billion yuan of medium-term liquidity net in March to guide major market interest rates around policy rates within a reasonable range. Therefore, it is possible that outright reverse repos will continue to net withdraw in April, and key market interest rates such as DR007 and the yield on 1-year AAA-rated bank certificates of deposit may stabilize or slightly rise.

Wang Qing said that since the end of February, the evolving Middle East situation has driven international oil prices sharply higher, and overall domestic prices have shown a strong upward trend in March. This could also disturb economic growth momentum. In the short term, amid external uncertainties, domestic monetary policy will continue to maintain ample liquidity while also temporarily leaning toward price stabilization, possibly delaying the timing of rate cuts and RRR reductions. If external shocks further disrupt domestic economic growth, monetary policy will likely adopt a more accommodative stance.

Daily Economic News

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