The direct effect should be calmer overnight funding in China’s interbank market through month-end, with the 1 trillion yuan daily cap large enough to stop short-term rates spiking. The bigger market question is the rate the operations carry, which has not been confirmed. If it is set near the current overnight market level of around 1.25%, below the seven-day policy rate of 1.40%, traders may read it as a preview of a lower policy anchor, which would tend to support Chinese government bonds and could weigh on the yuan. If it is set at the top of the existing corridor, it would mainly act as a ceiling and carry little policy signal. For the Australian and New Zealand dollars and for oil, the operations matter only if they turn out to be the first step toward genuine easing that lifts Chinese demand.
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A day after saying it would study an overnight policy rate , China’s central bank has started using one every day, but until it reveals the price, markets cannot tell whether this is a dress rehearsal or a month-end safety net.
Summary:
The People’s Bank of China will conduct overnight reverse repo operations daily from 21 October to 2 November.
The operations will use fixed-rate, quantity-based tenders, capped at 1 trillion yuan a day.
Foreign-invested banks that act as RMB settlement banks will be eligible counterparties.
The move follows Governor Pan Gongsheng’s comments on Monday that the PBOC will study making the overnight rate its main policy rate.
The rate for the operations has not yet been confirmed and will be the key signal for markets.
It is unclear whether the operations will continue beyond 2 November or are mainly aimed at smoothing month-end liquidity.
China’s central bank will carry out overnight reverse repo operations every day from 21 October to 2 November, putting its newest liquidity tool into regular use a day after Governor Pan Gongsheng said the PBOC would study making the overnight rate its main policy rate.
The People’s Bank of China said the operations will be conducted through fixed-rate, quantity-based tenders, with a cap of 1 trillion yuan a day. In that format, the central bank sets the interest rate and banks bid for the amount of funding they want at that rate. Foreign-invested banks that act as yuan settlement banks will also be eligible to take part.
A reverse repo is a short-term loan from the central bank to commercial banks, secured against bonds. The PBOC currently uses its seven-day reverse repo rate, at 1.40%, as its main policy rate. It introduced overnight operations in June, priced in a corridor around the seven-day rate, but has used them only occasionally until now.
Speaking at the Financial Street Forum in Beijing on Monday, Pan said the overnight interbank rate had effectively already become the central bank’s target and that switching policy operations to an overnight tenor would make interest rate control more precise. He also announced wider access to central bank funding for foreign bank subsidiaries, a theme echoed in Tuesday’s decision to include foreign-invested settlement banks.
Several important details are not yet known. The most significant is the rate. If the operations are priced at the top of the existing corridor, they would act mainly as a ceiling on overnight funding costs. If they are priced closer to the current overnight market rate of around 1.25%, markets may see them as an early test of a lower policy anchor.
It is also unclear whether the daily operations will continue after 2 November. A fixed window could mean the move is mainly about smoothing liquidity over month-end, when Chinese money markets can tighten. An extension would point more clearly toward a permanent shift. The PBOC has not said whether the overnight operations will run alongside its seven-day operations or gradually replace them, and take-up by banks will show how much demand there is for the new facility.
The rate announced with the first operation on Wednesday, and any guidance on what happens after 2 November, will offer the clearest signals yet on how quickly the PBOC intends to move to an overnight policy rate.
Governor Pan Gongsheng
This article was written by Eamonn Sheridan at investinglive.com.
