What changed and what the PBOC announced
China ended a four-month quiet period by publishing the level of its new primary policy rate. The People's Bank of China put the overnight reverse repo rate at 1.25%, lower than the 1.4% seven-day benchmark noted in the same Friday release.
That 1.25% setting had already appeared in markets. Bloomberg previously reported the first overnight reverse repo operation in June was done at that level. The central bank also said it will begin daily overnight reverse repo operations from Monday.
How operations and benchmarks will shift
Policymakers will move the seven-day reverse repo from a single rate to a range of rates, and they will scale back how often they use it. The statement said the seven-day tool will be deployed in stretches like tax periods and at month end.
Other tools that had been pegged to the old benchmark will instead reference the overnight rate from here on. The PBOC has avoided calling this a loosening, likely to prevent a rush into Chinese government bonds. Financial News, an outlet affiliated with the PBOC, reported earlier this month that economists urged markets not to treat the reform as a rate cut.
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This revamp fits into a decades long push to move China's interest rate system away from a centrally managed design, and the PBOC signaled in October that it was preparing to shift its focus from the seven-day rate to the overnight rate.
Market reaction and expert comments
In the moments leading up to the decision, the yield on China's 10-year government bond eased to 1.63% from 1.64%. Some investors view the transition as a form of easing, since the 1.25% rate came in lower than expected when it first appeared in late June.
Bank economists, among them those at Societe Generale SA, had thought the change could take months, given the likely need to ramp up overnight liquidity operations gradually. "While this move is well telegraphed, the timing is a bit earlier than expected," said Xiaojia Zhi of Credit Agricole CIB. Zhi added, "The PBOC could consider the switch now to help deliver lower short-end rates in the money markets," possibly to settle nerves after reports of state-owned developer Zhuhai Huafa Group Co.'s missed trust-product payments.
The sooner-than-expected announcement could be "a good strategy to get any further speculation out of the way," according to Frances Cheung, who runs rate strategy at Oversea-Chinese Banking Corp. "Given that there will be overnight reverse repo operations daily, market participants will be comfortable relying on the overnight liquidity with rollovers, even if the liquidity demand is for a multi-day period," she said. "Effectively, this would lower the funding costs."
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