The People's Bank of China (PBoC) drained 10 bln yuan from the interbank market via repurchase transactions, using the special treasury bonds received last week from the Ministry of Finance. The repos were conducted at a yield of 3.2 pct, traders said. The 10-year special treasury bonds acting as collateral in the transaction carry a coupon of 4.3 pct.

Traders said that they expect these transactions to become a more regular fixture of weekly open market operations now that the central bank's stock of treasury bonds has been replenished.

Today's repo transaction follows last week's purchase of 600 bln yuan in special treasury bonds by the central bank as part of the financing agreement behind the establishment of the country's new sovereign wealth fund, known unofficially as the China Investment Company (CIC).

Those bonds have provided more tools for the PBoC to drain excess liquidity from the interbank market beyond the three-month, one-year and three-year sterilization paper that it currently relies upon. 'The purchase of special treasury bonds increases the central bank's bonds holdings and will help to increase the flexibility and effectiveness of the central bank's open market operations,' the PBoC said in a statement last week.

The repo transaction, in this case, involves the central bank placing treasury bonds with commercial banks for a fixed six-month period, at the end of which they will be returned.

The central bank restarted repo transactions in July, draining a total 65 bln yuan in two seperate transactions, following a five-month hiatus.

Analysts said at the time that the PBoC was deliberately restarting repo transactions to prep the market for the eventual receipt of the special treasury bonds.

They said that repos are more effective at locking up liquidity because the underlying bonds cannot be traded, unlike PBoC sterilization paper.

The PBoC suspended repos earlier this year as its holdings of treasury bonds diminished, analysts said. Those holdings were estimated to stand at just under 220 bln yuan prior to the receipt of the special treasury bonds.

The PBoC is eventually expected to receive 1.55 trln yuan in special treasury bonds from the Ministry of Finance.

Last week, an official at the China Government Securities Depository Trust & Clearing Co told Market News, a sister newswire of XFN-Asia, that the Finance Ministry will sell a further 100 bln yuan of bonds to the market directly in September, and another 100 bln yuan in bonds to the market later this year.

Others believe that the 200 bln yuan will come from the PBoC's own holdings of special treasury bonds.

The CIC is expected to be launched imminently and will initially be capitalized at around 200 bln usd in foreign exchange reserves.