(Yicai Global) Oct. 31 -- Market volatility in China has not changed, despite the People's Bank of China last week releasing a new monetary tool, a 63-day reverse repo, in order to stabilize the market amid growing expectations of stricter financial regulations and tighter liquidity.

The Chinese stock and bond markets both declined yesterday. The Shanghai Composite Index fell to 3390.34 points, down 26.47 points or 0.77 percent to mark the largest one-day decline since a 1.63-percent dip on Aug. 11 this year. The same day, treasury bond yields surpassed 3.9 percent to hit a three-year high.

China's central bank has been tightening liquidity on the interbank market since the end of last year, according to a recent research report by HSBC Holdings Plc [LON:HSBA;HKG:0005;NYSE:HSBC]. By September this year, the seven-day repo rate in the interbank market had risen to 2.9 percent, up from 2.5 percent in January. The nation's current monetary situation is the tightest it has been since October 2015.

The central bank's use of new tools in the open market does not mean a shift in monetary policy, analysts said. On the contrary, more financial regulatory policies will be unveiled in future to curb risk, and the central bank will maintain its prudent and neutral monetary policy. This may be the main reason behind the recent market volatility.

Preventing systemic financial risks is an important task in defusing major problems. A report delivered at the 19th National Congress of the Communist Party of China suggested that China should improve its financial regulation system to cut back risk and aim for an incidence rate of zero.

China has put risk prevention at the top of its priority list in the financial world. It is likely to introduce new regulations in the coming months, with supervisory bodies using more macro-prudential tools, the HSBC report said.

As long as financial stability remains a key issue for the central government, the People's Bank of China is likely to maintain a neutral to slightly tight liquidity policy in the domestic market, Frances Cheung, head of macro strategy for Asia at Westpac Banking Corp. [ASX:WBC;NZX:WBC;NYSE:WBK], told Yicai Global.

The central bank conducted a CNY50-billion 63-day reverse repo on Monday, followed up by a seven-day contracts worth CNY70 billion and 14-day contracts worth CNY30 billion, injecting a net CNY40 billion into the banking system.

However, use of these monetary instruments only reflects the central bank's intention for medium- and long-term funding stability, and does not mean there is a change in policy orientation.

The reverse repos help the central bank achieve more flexible and precise liquidity regulation, said Ming Ming, chief fixed-income analyst at CITIC Securities Co. [SHA:600030;HKG:6030]. Behind them, there is still the intention of stabilizing liquidity levels and avoiding disturbance, he added.

Though figures for industrial production and investment growth in the third quarter were adequate, the central bank is still keeping liquidity tight. The central bank still has sufficient reason to maintain its neutral stance, even though the yuan dipped against the dollar at the beginning of the fourth quarter, HSBC added.