(Yicai) July 22 -- China’s central bank lowered its market operations rate for the first time in nearly a year and simultaneously cut benchmark bank lending rates for the second time this year to help bolster the country’s economic recovery.

The People’s Bank of China today trimmed the rate on seven-day reverse repurchase agreements -- a monetary policy tool to manage liquidity in the financial system -- by 10 basis points to 1.7 percent, the first reduction since last August.

The PBOC also lowered the one-year loan prime rate 10 bps to 3.35 and the five-year LPR -- used by commercial banks to set mortgage rates -- by the same amount to 3.85 percent. The move follows a 25 bps reduction in February.

The reduction in policy rates is expected to gradually work through into the real economy, lower overall borrowing costs, consolidate the economic recovery, and break the negative cycle of the falling yields on long-term bonds and weakening expectations, experts noted.

The simultaneous cuts show that the LPRs are being further linked with the PBOC’s short-term market operations, while the role of the medium-term lending facility -- which the PBOC uses to provide medium-term funding to commercial banks and other financial institutions -- is gradually lessening, according to market insiders.  

PBOC Governor Pan Gongsheng noted last month that the bank will elevate the importance of short-term rates. “Currently, the seven-day reverse repo operation has basically assumed this function, and the policy rate roles of monetary policy tools with other maturities will be de-emphasized,” he said.

The central bank is also addressing the tight supply of bonds. From this month, financial institutions that seek to sell medium and long-term debt can apply for a staged reduction or exemption of MLF loan collateral, thereby increasing the scale of tradable bonds and alleviating limited market supply, it also announced today.

MLF loans to financial institutions exceed CNY7 trillion (USD962.6 billion) at present, and most of them use treasury bonds and local government bonds as collateral, according to market insiders. If the collareral was reduced or waived, the institutions could sell these bonds, alleviating the asset shortage in the bond market, they added.

Editors: Dou Shicong, Emmi Laine