OPEN MARKET OPERATIONS BY THE PBC IN 2002

through open market operations in 2002, the People's Bank of China(PBC) placed 180.16 billion yuan of base money into circulation and withdrew 281.99 billion yuan from circulation---the net withdrawal reaching RMB101.82 billion yuan.

The targets of the PBC open market operations

While the loan and deposit rates of financial institutions have not been fully decided by market force, the PBC focuses its operational target on base money, and takes the interest rates of the money and bond markets as the monitoring indexes for base money adjustment. To promote interest rate liberalization, the PBC will actively transform the operational target of open market operations to the money market rate.

Repo since June 25, 2002

Since 2002, the excessively rapid growth of base money, caused mainly by the large volume of RMB input for the purchase of foreign exchange, has kept the liquidity of commercial banks at comparatively high levels. In order to maintain the appropriate liquidity of commercial banks and control the systematic risk of the bond market, the PBC carried out 22 repos with a net withdrawal of 202.68 billion yuan between June 25 and mid December 2002.

The money market rate in 2002

Since 2001, funds supply has exceeded demand in the money market and the market rate has been declining. In the first half of 2002, the rate for 7-day repo lingered only six bps over the reserve rate.

On June 25, the PBC started using repo operations. Accordingly, as of August 20 the interest rates in the money market began to rise slightly. On September 19, the 7-day repo rate recovered to 2.18 per cent.

On September 20, the money market saw a temporary contraction. Thereby, the PBC performed open market operations. On September 30, the 7-day repo rate declined to 2.25 per cent.

On December 16, the market rates presented an upward trend. The next day, the PBC began reverse repo operations and purchased bonds, thus keeping the 7-day repo rate at around 2.35 per cent.

The PBC's purchase of 30-year treasury bonds

Among the successive bond purchases in 2002, on September 3 and 10, the PBC bought the fifth issue of 2002 treasury bonds issued by the Ministry of Finance.

The fifth issue of 2002 treasury bonds (020005) issued by the Ministry of Finance holds a maturity of 30 years. Since the market could not price 30-year bonds reasonably and the issuing rate was obviously low, these bonds had seen few transactions since their listing. Therefore, on September 3 and 10, the PBC bid the 30-year bonds to all 40 open market primary dealers. This purchase has rationalized the maturity structure of market rates and modified the yield curve to some extent, which had originally been distorted by 30-year treasury bonds.

The conversion of repos into central bank papers

The PBC repo operation, which began on June 25, 2002, was restricted by lack of bonds at the end of September 2002. On September 24, the immature repos performed by the PBC from June 25 to September 24 were converted into 19 central bank papers with an issuing size of 193.75 billion yuan.

Transparency of open market operations

Transparency of open market operations is guaranteed by the operational system. The open market operation system of the PBC includes the primary dealer system for open market operations, the liquidity monitoring system, the decision-making and operational procedures, the settlement system and the bulletin system.

(by Shui Ruqing& Sun Guofeng)