The People's Bank of China is considering moving its core market tool from seven days to overnight. Governor Pan Gongsheng told the Financial Street Forum in Beijing that the bank will study switching the main tenor of open market operations to overnight at an appropriate time. If it goes ahead, the overnight reverse repo rate becomes the lead policy lever, according to Financial News, which is linked to the central bank.
Pan added that DR001 - the rate on overnight interbank repos - has effectively become the operational target. He also noted the PBOC introduced overnight operations in June to broaden short-term liquidity options and has run them each month from June through September, ramping up both frequency and size to meet cash needs around month-end and tax periods.
The rate on new overnight reverse repos was set at 1.25% in June, below the current seven-day benchmark. Before Pan spoke, a group at Huatai Securities headed by Zhang Jiqiang argued that elevating the overnight tenor to the primary instrument would "function as a de facto rate cut."
Xing Zhaopeng, who serves as senior China strategist at Australia and New Zealand Banking Group Ltd., said the change "will substantially change the policy framework and the market," even though the exact rate has not been specified. He added that the rate corridors could be adjusted if the overnight reverse repo lands below 1.4%. Given that the interbank overnight repo rate sits under 1.3% at present, he sees 1.25% as a plausible level.
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Overnight repos are the busiest corner of China's money market, and they show what it costs banks to borrow for a single night using bonds as collateral. Pan said bonds and derivatives could peg to the repo rate, and he called for a broader shift in how loans and other products are priced. Companies with strong balance sheets can negotiate to use DR001 as the anchor for new loans, he said, while the loan prime rate can still guide lending to smaller firms and households. The central bank plans to publish guidance to help financial institutions make the switch.
The market read the signal but did not lurch. Following the remarks, the overnight repo rate held at 1.26%. The offshore yuan edged up 0.1% to 6.6813 per dollar, while yields on 10-year and 30-year government debt were virtually unchanged at 1.64% and 2.06%.
Short-term funding costs have been soft, with overnight interbank borrowing rates slipping below 1.3% in October - the lowest since May - widening the gap with the seven-day reverse repo. The PBOC also plans a new liquidity facility, designed with financial and stock regulators, to help non-bank institutions meet large client redemptions and to build a mechanism that steadies the bond market while avoiding a feedback loop of selling and tightening liquidity.
If overnight becomes the policy anchor, China's setup would look more like other major central banks that target overnight rates. For your portfolio, that points to loan and bond pricing gravitating toward DR001, a central bank backstop for non-bank liquidity, and a policy stance that leans on very short-term rates to guide broader borrowing costs.
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