The Chinese central Bank decided to help the market after the panic created by the coronavirus, by introducing liquidity through reverse repos by 1.2 trillion Yuan{$236 billion}. This amount is less by 200 billion Yuan since 1 trillion Yuan in repos has expired is is up for renewal.
Authorities also went a step forward to avoid a market panic(stocks already fell by 8% on Friday) so that on Monday's trade session(FEB 2,2020), there will be no trading in the Options market before the opening of the subsidiary market.
What is a reverse Repurchase Agreement (reverse REPO)
In a reverse purchase agreement the buyer agrees to buy securities from the seller on the condition that the seller will buy them back at a higher price on a predetrmined future date. The assets act as a collateral in the event the seller is unable to repurchase them.
Reverse repo transactions temporarily reduce the amount of reserve balances within the banking system.
The diagram above depicts the transaction between two banks, the central bank, and the commercial banks. Bank A has cash beyond its capital reserve requirements and Bank B, the selling bank needs cash to meet its capital requirements. The repurchase price is greater than the initial sales price, and the difference represents the imputed interest.
REPO
A repurchase agreement is a form of a short term borrowing, usually overnight, in government securities.
Under the reverse REPO the Peoples Bank of China will repurchase securities from investors who seek cash os that a force selling can be avoided, and thus a further fall in the market.
Bill T. Alexnadratos, Msc., BA
3 Feb 2020
