BEIJING/SHANGHAI, Oct 19 (Reuters) – China’s central bank is considering switching its main policy rate to the overnight reverse repurchase rate, state media reported on Monday, in a shift aimed at improving the transmission of monetary policy to support the economy.
The overnight repo rate would replace the seven-day reverse repo rate, which has served as the main policy benchmark since 2024.
People’s Bank of China Governor Pan Gongsheng said the change is part of efforts to refine the central bank’s control of short-term interest rates, according to central bank-run Financial News.
“Currently, the interbank overnight repo rate has effectively become the target rate for the PBOC’s monetary policy,” Pan was quoted as saying at a financial forum in Beijing.
“It sensitively reflects the supply and demand for short-term liquidity and has shown greater stability in recent years.”
The change will make interest rate control more precise, Pan said.
The policy shift would give the PBOC greater control over liquidity conditions and would bring its policy framework more in line with global peers.
Central banks such as the US Federal Reserve already use overnight rates as their main policy rates to better anchor the yield curve.
China’s 30-year government bond yield fell more than 1 basis point after the announcement.
“The monetary policy framework is now in line with overseas, and it will make it smoother to promote yuan internationalisation,” said Zhou Hao, chief economist at Guotai Junan International.
GROWTH REBOUND EASES PRESSURE FOR AGGRESSIVE STIMULUS
Official data on Monday showed that China’s economic growth rebounded to 4.5% year-on-year in the third quarter, beating expectations and easing the pressure on policymakers to deliver more aggressive stimulus measures to meet the annual growth target of 4.5% to 5%.
The actual operating rate for overnight reverse repos will be announced when the central bank makes the switch, and the change does not amount to a rate cut, said Wang Qing, chief macro analyst at Golden Credit Rating International.
China’s interbank market has stayed flush. The average rate of overnight repos stood near a five-month low of around 1.25%, broadly in line with the reported borrowing cost of the central bank’s overnight reverse repo operations. That is below the seven-day reverse repo rate, currently at 1.4%.
The change is in line with shifts in China’s financial structure, where direct financing via bonds and equities has surpassed traditional bank lending to become a key source of new funding, with credit allocation gradually moving away from more credit-intensive sectors such as property.
LOAN PRICING REFORM, SUPPORT FOR NON-BANKS
Overnight reverse repo operations debuted in late June as the latest addition to the PBOC’s toolkit.
Overnight transactions account for more than 80% of repo turnover in China’s interbank money market.
The PBOC will also issue policy guidance in the future to push forward reform of loan pricing benchmarks, Pan said. The reform would move lending away from a relatively narrow reliance on the loan prime rate (LPR) toward a more diversified set of benchmarks.
Some financially strong companies could choose either the interbank overnight repo rate or the LPR as the benchmark for floating-rate loans, after consulting with financial institutions, he said.
The PBOC will also widen the range of institutions eligible to use its Standing Lending Facility and set up a liquidity support tool for non-bank financial institutions, Pan said.
The measures are aimed at strengthening liquidity support for non-bank institutions, including insurers and fund managers, providing a backstop during periods of severe market stress.
(Reporting by Ziyi Tang, Li Gu, Kevin Yao and Beijing Newsroom; Editing by Kevin Liffey, Saad Sayeed and Xevi Fontdegloria)
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