China's central bank plans overnight reverse repo in next stage of policy shift

Bloomberg

Jun 25

The move comes after an announcement from PBOC governor Pan Gongsheng at the Lujiazui Forum last week, where he signalled plans to expand the central bank's overnight reverse repo operations.(June 25)...

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The overnight funds will be offered at a fixed rate and the operation will better match the short-term liquidity needs in the banking system, the central bank added.\nA new overnight reverse repo rate will be an addition to the PBOC's regular seven-day reverse repo rate, which has served as the main policy benchmark since 2024, and currently stands at 1.4%. The central bank ceased to have longer-tenor policy rates after it revised the bidding method and downplayed the use of other tools in an overhaul that kicked off two years ago.\nThe announcement on Thursday represents another piece of the PBOC's years-long reform of its policy toolkit that's aimed at better influencing borrowing costs to support growth, and gives authorities an option to switch to an overnight rate as the benchmark. While any shift to an overnight rate is likely to take time, a transition could bring China closer to the practice of its global peers such as the US Federal Reserve, which relies heavily on the overnight target rate to steer the economy's path.\n\"This is a key step to migrate towards a policy rate framework more similar to that of the US,\" said Becky Liu, the head of Greater China strategy at Standard Chartered Bank. \"The key to watch is the interest rate. If this new overnight reverse repo rate is at 1.25% or below, we see it as a de facto rate cut by the PBOC.\" \n\nThe move comes after an announcement from PBOC governor Pan Gongsheng at the Lujiazui Forum last week, where he signalled plans to expand the central bank's overnight reverse repo operations. During his address, Pan revealed several initiatives aimed at achieving greater precision in steering short-term funding costs, including narrowing the interest-rate corridor and introducing a yuan repo facility for overseas central banks.\nOver the past year, the PBOC has increasingly referenced the overnight interbank repo rate as a key target as it managed borrowing costs. \nThe new overnight tool provides the PBOC a dedicated instrument to influence overnight funding conditions directly, said Tommy Xie, the head of Asian macro research at Oversea-Chinese Banking Corp (OCBC). \"The key objectives are to improve the precision of liquidity operations, strengthen control over overnight funding conditions and reduce excessive volatility in money market rates.\"\nThe latest expansion in the central bank's monetary tool kit coincides with growing discussion among market players on the need for more stimulus, including a potential interest-rate cut, after data indicated that China's economy lost momentum in the second quarter. \nWhile exports and imports expanded briskly in May, consumer spending and investment fell to levels unseen since the pandemic. Huang Yiping, a PBOC adviser, told Bloomberg Television this week that a rate cut could still take place this year.\n\nThe seven-day reverse repo rate, which is the current policy benchmark, has been unchanged since May 2025. PBOC chief Pan hinted at the introduction of the overnight repo during the Lujiazui forum, with traders saying a policy framework shift would imply an easing bias to support growth. \n\"The PBOC could effectively cut policy rates through a framework shift - as the European Central Bank did in March 2024 - by shifting the policy benchmark to the overnight reverse repo rate instead of the seven-day rate,\" Bloomberg Intelligence strategists Stephen Chiu and Jason Lee wrote in a note.\nMost Chinese government bond yields edged lower following the central bank's announcement on Thursday. The 10-year yield slipped one basis point to 1.73% to head for its first decline in five sessions.\nBut some analysts cautioned that the PBOC may face some challenges that could impede the transition to an overnight key policy rate. \nThe vast majority of contracts used by financial institutions to hedge against rate swings are still tied to the seven-day repo rate, making it hard to dislodge quickly, according to Bloomberg Economics. The seven-day rate is also a crucial anchor for defining China's latest interest-rate corridor, and the newly launched repo facility for overseas central banks.\n\nThe new overnight operation shows a gradual approach to reform, Financial News, a newspaper affiliated with the PBOC, cited an unnamed expert as saying in a report on Thursday.\nJeffrey Zhang, a strategist at Credit Agricole CIB, expects the rate of the debut PBOC overnight reverse repo operation to be fixed at 1.3%, where the interbank market's overnight repo rate usually sits.\n\"Overall, we believe the PBOC will still mainly rely on seven-day repo operations for its daily open market operations, while overnight reverse repos could be conducted to smooth out seasonal factors, and any transition to the overnight rate as benchmark policy rate would still take time,\" he said.\nUploaded by Tham Yek Lee","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":false,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"isVideo":false,"video":null,"symbols":[],"gpt_button":0,"need_auth":false,"need_login_tip":false,"code":"91000000","status":"200"}}}