[Guozun Law Firm] Central Bank Reverse Repurchase? No — Central Bank Positive Repurchase: A Monetary Policy Instrument for Regulating Market Liquidity and Curbing Inflation

I. Definition of Central Bank Positive Repurchase

Central bank positive repurchase, the full name being central bank positive repurchase operation, is a monetary policy instrument by which the central bank sells bonds and other assets in the open market, and agrees to buy back these bonds at a pre-determined price on a specific future date, thereby achieving the purpose of regulating market liquidity.

II. Purposes of Central Bank Positive Repurchase

1. Regulating market liquidity: Through positive repurchase operations, the central bank can withdraw liquidity from the market, thereby controlling the money supply and achieving the purpose of regulating market interest rates.

2. Curbing inflation: When market liquidity is excessive, the central bank, through positive repurchase operations, withdraws funds, which helps curb inflation.

3. Stabilizing the financial market: Through positive repurchase operations, the central bank can stabilize the financial market and prevent financial risks.

III. Operational Method of Central Bank Positive Repurchase

1. Selling bonds: The central bank sells treasury bonds, policy financial bonds, and other bonds in the open market in order to withdraw liquidity.

2. Agreement on repurchase: The central bank and the bond purchaser agree to buy back these bonds at a pre-determined price on a specific future date.

3. Freezing of funds: During the period of the positive repurchase operation, the bond purchaser needs to freeze the funds in the central bank account until the repurchase matures.

IV. Impact of Central Bank Positive Repurchase

1. Market interest rates: Central bank positive repurchase operations will raise market interest rates, because the bond purchaser needs to pay interest to the central bank.

2. Money supply: Positive repurchase operations will reduce the money supply in the market, thereby curbing inflation.

3. Financial market: Central bank positive repurchase operations help stabilize the financial market and reduce financial risks.

V. Difference Between Central Bank Positive Repurchase and Reverse Repurchase

1. Direction of operation: Positive repurchase means the central bank sells bonds and withdraws liquidity; reverse repurchase means the central bank buys bonds and releases liquidity.

2. Purpose: Positive repurchase aims to curb inflation and stabilize the financial market; reverse repurchase aims to regulate market liquidity and stabilize the financial market.

3. Market interest rates: Positive repurchase operations will raise market interest rates; reverse repurchase operations will lower market interest rates.

VI. Example of Central Bank Positive Repurchase Operation

Taking 2021 as an example, the People’s Bank of China carried out multiple positive repurchase operations in the open market in order to withdraw liquidity and curb inflation. In January 2021, the central bank carried out one positive repurchase operation, selling RMB 10 billion of treasury bonds and agreeing to buy them back at a pre-determined price on a specific future date.

VII. Limitations of Central Bank Positive Repurchase

1. Fluctuation of market interest rates: Positive repurchase operations may cause market interest rate fluctuations and produce adverse effects on the financial market.

2. Limited effect of liquidity withdrawal: The liquidity withdrawn by positive repurchase operations is limited, and it is difficult to solve the fundamental problem of excessive market liquidity.

VIII. Future Development Trend of Central Bank Positive Repurchase

With the continuous development of our country’s financial market, central bank positive repurchase operations will play an increasingly important role in monetary policy regulation and control. In the future, central bank positive repurchase operations will pay more attention to the following aspects:

1. Improving operational flexibility: The central bank will, according to market conditions, flexibly adjust the scale and term of positive repurchase operations.

2. Strengthening coordination with other monetary policies: The central bank will combine positive repurchase operations with other monetary policy instruments to form policy synergy.

3. Improving the market mechanism: The central bank will continuously improve the market mechanism and enhance the effect of positive repurchase operations.

Central bank positive repurchase operations are a kind of monetary policy instrument conducted by the central bank in the open market, and they have important significance for regulating market liquidity, curbing inflation, and stabilizing the financial market. With the continuous development of our country’s financial market, central bank positive repurchase operations will play an increasingly important role in monetary policy regulation and control.