Open Market Operations in China

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    Open market operations in China are securities transactions conducted by the People’s Bank of China (PBOC) – being the Chinese central bank, with a cohort of major banking sector financial institutions for the purpose of fulfilling its monetary policy goals.

    PBOC first began to undertake open market operations in March 1994, following the launch of key reforms of the Chinese foreign exchange system.

    PBOC used OMO to make adjustments to the foreign exchange market in the wake of these reforms, purchasing and selling forex in order to maintain the fundamental stability of the renminbi exchange rate. 

    In 1995 the “People’s Bank of China Law” (中国人民银行法)  stipulated that the final goal of Chinese monetary policy would be to: 1)  maintain the stability of the value of the currency, and 2) expedite the growth of the economy. 

    In 1996 PBOC stipulated that the money supply was an “intermediary target,” and in April of that year commenced the purchase and sale of government bonds as part of its OMO.

    1997 saw a shift in PBOC’s monetary policy focus from the prevention of inflation as its primary goal, to a gradual shift towards maintaining necessary economic growth in tandem with the prevention of currency deflation.  

    In 1998 PBOC cancelled the use of controls on the scale of lending, and began to use a range policy tools to achieve its monetary policy targets. 

    In the same year PBOC selected a cohort of 25 leading financial institutions to serve as primary dealers for its OMO. These primary dealers were commercial banks capable of engaging in a large volume of bond transactions, and as of 2019 numbered 49 in total. 

    By 2000 OMO had emerged as one of the key monetary policy tools employed by PBOC. As of the end of that year PBOC had injected 180.4 billion yuan in base money into the Chinese financial system via OMO, accounting for 63% of PBOC’s increase in base money. 

    Since then Chinese OMO have also played a key role in areas including: 

    • Using the purchase or sale of government bonds to expand or contracts reserves held by member banks with PBOC, this influencing their ability to extend credit as well as short-term interest rates.
    • Using influence over interest rates to control exchange rates.
    • Satisfying demand from Chinese commercial banks for funds.
    • Coordinating with Chinese central government fiscal policy.
    • Providing an organised market for government securities.

    PBOC’s OMO currently consist of three main transaction types: 

    1. Repo and reverse repo transactions
    2. Spot transactions
    3. Issuance of central bank bills.

    PBOC’s repo transactions involve PBOC selling securities to primary dealers, and setting a date in the future for the repurchase of such securities from the primary dealer

    Such transactions temporarily reduce liquidity in the banking system by reducing the volume of funds held by the primary dealer. 

    Conversely PBOC’s reverse repo transactions involve PBOC purchasing securities from primary dealers, and setting a date in the future for the resale of such securities back to the primary dealer. 

    Such transactions temporarily increase liquidity in the banking system by raising the volume of funds held by the primary dealer. 

    Spot transactions are divided into spot buy outs (现券买断) and spot sell offs (现券卖断), both of which result in long-standing changes to the money supply. 

    Spot buy outs involve PBOC directly purchasing securities on the secondary market, achieving a one-time increase in base money. 

    Spot sell offs involve PBOC directly selling off securities it holds, for a one-time reduction in base money. 

    Central bank bills are short-term bills issued by PBOC, which PBOC issues to reduce base money temporarily. 

    On January 2013 PBOC expanded its monetary policy toolkit with reference to international practice, with the launch of short-term liquidity operations (SLO) (短期流动性调节工具).

    SLO’s are intended to serve as an adjunct to standard OMO, providing PBOC with a means of correcting temporary volatility in Chinese banking sector liquidity. 

    On 25 January PBOC approved the launch of central bank bill swaps (BS), to support the issuance of perpetual bonds by Chinese banks as part of efforts to improve their capital standing. 

    As of 2019 the 49 primary dealers that participate in PBOC’s open market operations include:

    1. ICBC
    2. Agricultural Bank of China
    3. Bank of China
    4. China Construction Bank
    5. Bank of Communications
    6. Postal Savings Bank of China
    7. China Development Bank
    8. The Export Import Bank of China
    9. China Merchants Bank
    10. Industrial Bank Co., 
    11. Shanghai Pudong Development Bank
    12. China Zheshang Bank
    13. China Everbright Bank
    14. Huaxia Bank
    15. China CITIC Bank
    16. China Minsheng Bank
    17. Ping An Bank
    18. Hengfeng Bank 
    19. Guangfa Bank
    20. Bank of Beijing
    21. Bank of Ningbo
    22. Bank of Hangzhou
    23. Bank of Jiangsu
    24. Bank of Shanghai
    25. Huishang Bank
    26. Bank of Nanjing
    27. Bank of Guangzhou
    28. Bank of Luoyang
    29. Bank of Zhengzhou
    30. Bank of Dalian
    31. Bank of Changsha
    32. Bank of Hebei
    33. Zhongyuan Bank
    34. Bank of Xiamen
    35. Bank of Qingdao
    36. Bank of Jiujiang
    37. Xiamen International Bank
    38. Shanghai Rural Commercial Bank
    39. Guangzhou Rural Commercial Bank
    40. Guangdong Shunde Rural Commercial Bank
    41. Beijing Rural Commercial Bank
    42. Chongqing Rural Commercial Bank
    43. Standard Chartered (China) 
    44. HSBC (China) 
    45. Citibank (China) 
    46. MUFG Bank (China)
    47. CITIC Securities
    48. China International Capital Corporation
    49. China Bond Insurance Company.