8 Economists' Investment Tips
Xu Xiaoqing: “Ten-Year Interest Rate Mentality Law” -- Upper and Lower Limits of Interest Rate Corridors
Summary of this issue
Positive and reverse repurchases
How is the upper and lower limit of the seven-day repurchase interest rate determined? Here's a little introduction to the open market.
What are the two most common things central banks do in the open market? Positive and reverse repurchases. Generally, in actual repurchase transactions, we rarely talk about positive and negative; we only talk about positive and negative when the central bank and bank make repurchases. The so-called positive repurchase means that money is borrowed from a bank; it is a method of returning liquidity; reverse repurchase is a method where the central bank lends money and lends money to financial institutions.
So in a normal interest rate system, what should we think?
Positive repurchases should be the lower limit of interest rates, while reverse repurchases are the upper limit of interest rate fluctuations in the money market. If the market is extremely well-funded, and interest rates continue to fall. When it falls to a level, the central bank doesn't think it works; interest rates are too low. At this point, it will take away liquidity through positive repurchases.
The central bank will give a tender interest rate that is being repurchased. This means that when the interest rate falls to this position, you can all give me money. To put it bluntly, this interest rate is a lower limit that the central bank can accept. Conversely, if capital is very tight, then the central bank lends money to the bank at a reverse repurchase tender interest rate, which means that this interest rate cannot be any higher.
Therefore, the reverse repurchase is the upper limit, and the positive repurchase is the lower limit.
Reverse Repurchase vs Hot and Sour Powder (SLF)
But everyone will say it wrong. The lower limit in the picture below is a seven-day reverse repurchase, but according to what I just said, the reverse repurchase shouldn't be the lower limit; should it be the upper limit? But what is the upper limit in the graph? The upper limit is SLF, a convenient tool for regular loans. I'm also used to calling it “hot and sour powder,” which is relatively simple. The only difference between it and “spicy powder,” or MLF (Medium-Term Loan Facilitator), is the term.
In fact, people can also understand SLF as the repurchase interest rate. That is, if a bank is short of money, then it can request a loan from the central bank. The loan period ranges from overnight to three months. The central bank will lend money to the bank according to interest rates corresponding to different periods. This is SLF.
They all borrow money from central banks. What is the difference between SLF and reverse repurchase interest rates operated by open markets?
The initiator of reverse repurchases is the central bank. It is up to the central bank to decide when they want to do positive repurchases and reverse repurchases, and how much. Open market traders, that is, major banks, can only accept it. However, SLF's initiator, generally speaking, should be a bank. Of course, whether the central bank is willing or unwilling to give is another matter, but at least the active sponsor should be a bank. This is the difference between reverse repurchase and SLF.
Why is the upper limit SLF and the lower limit is a seven-day reverse repurchase?
Let's go back and talk about why the reverse repurchase became the lower limit of the seven-day repurchase interest rate, while SLF became the upper limit. This is because in China, the repurchase rate is actually a comprehensive interest rate for all financial institutions to trade together; it does not specifically refer to the interest rate for certain bank transactions. In foreign countries, such as LIBOR, its meaning is very clear, that is, how much does it cost to borrow money from these dozen banks that meet this credit rating.
The repurchase interest rate in China is actually a multi-level interest rate. The cost of borrowing money from large banks is definitely not the same as the cost of borrowing money from small banks. Non-bank financial institutions, such as brokerage firms, insurance companies, and fund companies, certainly don't cost the same as banks.
We know that repurchase interest rates are now divided into DR and R. DR refers to the financing costs of depository financial institutions, that is, banks, and R includes the financing costs of all financial institutions that are not banks. And the seven-day repurchase rate we saw was actually a weighted result of all financial institution transactions.
So what is the actual concept of lower limit? In fact, it means how much does the institution that can get the money at the lowest cost among these trading institutions pay. After getting this amount of money, if it lends this money to someone else, the interest rate will definitely be higher.
This is why reverse repurchases have become the actual lower limit of repurchase interest rates, because there are actually only a few institutions that can actually get money from the central bank through open market operations. Not every bank is qualified to operate in the open market; only some large banks and joint stock banks can get money from the central bank.
The meaning of SLF is that some banks are not open market makers; they cannot get money through open market operations, but if interest rates keep going up, they can take the initiative to borrow money from the central bank when they feel that liquidity is tight.
One big difference between SLF and open market reverse repurchases is this. Banks operating in the private market, including some small banks, can also apply to borrow money from the central bank, then the central bank will lend to them according to the SLF interest rate, but this interest rate is obviously higher than the interest rate for large banks.
When market liquidity is tight to a certain extent, if all financial institutions suggest that they need to directly obtain capital from the central bank, the SLF interest rate level forms the actual upper limit of market interest rates.
An important background to the introduction and creation of these convenient tools that we have seen is that after 2013, the cost differences between different types of financial institutions in the market were significantly widened. The central bank only created these tools to solve this stratification problem, hoping to spread liquidity to more financial institutions.
However, people may ask why this phenomenon occurred after 2013, and there was little difference in financing costs between various financial institutions before 2013. I'll talk about this later. It is related to major changes in the funding mechanism.
The following table shows the various instruments that can influence the benchmark interest rate and their corresponding periods. I won't go into that here
“Revitalizing Stock”: Treasury Cash Deposit Tender
In addition to investing in liquidity through the open market, central banks can also invest capital through treasury cash deposit tenders. This also reflects its relationship with the Ministry of Finance. In other words, after the Ministry of Finance receives money by issuing treasury bonds, it is usually placed in the central bank.
What kind of concept is this? In other words, this money has not flowed into the entity because the central bank cannot lend money. If the money is placed in a commercial bank, the commercial bank can immediately spend the money; put it in the central bank, in plain terms, the money is collected.
Therefore, we know that if the Ministry of Finance continues to issue debt but does not make fiscal expenditure, it will actually have a tightening effect on the liquidity of the entire society, because issuing bonds means transferring part of the liquidity in society into the hands of the central bank.
What should the central bank do if it wants to regulate this liquidity? I can only put the money that the Ministry of Finance has here back into the hands of commercial banks through a tender. They say that I now have a sum of money from the Ministry of Finance, and I will give it to whoever wants to provide a high interest rate. So this is also a means of providing liquidity, just like open market operations.
As you can see from the chart below, the tender interest rate is generally consistent with the interest rate of the entire money market.
We sometimes pay attention to the tender interest rate for treasury cash; in fact, it is because we can see the tightness of capital in the market through tenders. Because of this tender interest rate, especially for large banks, they are all willing to accept it. The interest rate on interbank deposits is the interest rate on deposits issued by banks to other banks. Due to differences in banks' qualifications, the difference may be quite large, and the treasury cash tender interest rate represents an interest rate level that banks with the lowest financing costs in the market need to accept.
Review: Key Features of Benchmark Interest Rates
In China, the real benchmark is actually the seven-day repurchase interest rate. Speaking of the benchmark interest rate, let's review a few important characteristics of the benchmark interest rate:
Therefore, it has all the characteristics that a benchmark interest rate should have, and it can affect the cost of borrowing money for all major players in this society.
Attachment: Course Outline
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That is the content of this course, thank you all.
