China’s central bank moves its main operations to a 1.25% overnight rate

The People's Bank of China (PBOC) said on Friday, 30 October, that from Monday, 2 November, it will hold overnight reverse repurchase operations every working day, using a fixed rate and quantity bidding, with the rate currently at 1.25%, Securities Daily reported via China News Service. The 7-day reverse repo, which has been the bank's main open-market tool since 2014, carries a rate of 1.40%.

Under the change, 7-day operations switch to a fixed quantity with rate bidding and multiple winning prices, and will be held mainly around tax payment periods and month-ends. Other tools that were priced as a spread over the 7-day rate, including temporary repo operations and a repo facility for foreign central banks, will instead be priced off the overnight rate, with the same spreads, according to the notice as reported.

Securities Daily said PBOC Governor Pan Gongsheng had told a financial forum earlier this month that the interbank overnight repo rate had in practice become the target of monetary policy, while the bank's main operations were still at a 7-day term. The newspaper said the first 7-day operation under the new setup is expected around the mid-November tax period.

The overnight rate had not been published before, Bloomberg reported via The Business Times, adding that China's 10-year government bond yield slipped to 1.63% from 1.64% just before the announcement. Goldman Sachs economists wrote that the switch is "not a conventional 15 basis-point policy rate cut" but effectively adds interbank liquidity, according to the report. That is their analysis; the PBOC has not described the change as an easing of policy.

This article explains a change to how China's central bank runs its operations. It is not investment advice.