For China’s money markets, daily fixed-rate overnight operations should mean tighter control of short-term funding costs and less of the month-end and tax-season volatility that has periodically rattled interbank rates. The shift also changes what traders will watch: the overnight rate, not the seven-day rate, now looks set to become the signal of PBOC intent, so any future adjustment to the 1.25% level will be read as a policy move. With October PMIs in contraction and equities coming off their worst month in more than a decade , a cleaner transmission channel gives Beijing a sharper tool if it decides to lower borrowing costs. For the yuan, the change is structural rather than directional, but it modernises a framework global investors have long found opaque.
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China is quietly swapping out the dial it uses to steer interest rates, trading a seven-day benchmark for an overnight one that brings its monetary toolkit closer to the Fed’s than ever before.
Summary:
The People’s Bank of China will conduct overnight reverse repo operations every working day from Monday , through a fixed-rate tender at 1.25%
The 1.25% rate, disclosed for the first time, is below the 1.4% seven-day reverse repo rate and broadly in line with market expectations
Seven-day operations move to a variable-rate tender with a fixed quantity, used mainly around tax periods and month-ends
Other tools previously priced off the seven-day rate will now be priced off the overnight rate, with spreads unchanged
Economists described the move as the clearest signal yet that China is adopting an overnight-rate system like those of major central banks
China’s central bank is changing the way it sets the price of money. From Monday, the People’s Bank of China will run overnight reverse repo operations every working day at a fixed rate of 1.25%, a step that moves it closer to making the overnight rate, rather than its long-standing seven-day benchmark, its main policy anchor, Reuters reported.
The PBOC said on Friday that the daily operations would use a fixed-rate tender based on quantity, and that the aim was to improve its management of short-term interest rates. It was the first time the bank had disclosed the overnight operating rate. At 1.25%, it sits below the 1.4% seven-day reverse repo rate and is broadly in line with market expectations and actual borrowing costs.
The change is more than technical housekeeping. For years, the seven-day rate has been the reference point for Chinese monetary policy, with a cluster of other tools priced at a spread above or below it. Those tools, including temporary repo and reverse repo operations and repo facilities for overseas central bank-type institutions, will now be priced off the overnight rate instead, with the spreads unchanged. The seven-day operations will continue, but they move to a fixed-quantity tender with multiple winning bid rates and will be used mainly around tax payment periods and month-ends.
In other words, the overnight rate is becoming the centre of gravity. One economist described Friday’s announcement as arguably the clearest signal yet that the PBOC is shifting toward an overnight-rate operating system similar to those used by the Federal Reserve, the European Central Bank and the Bank of Japan. Another said the reform lays the groundwork for diversifying the benchmarks used to price loans and for passing broad-based rate cuts through the financial system more effectively.
As we noted earlier this mont h, the move had been signposted. PBOC Governor Pan Gongsheng told a financial forum in October that the bank was studying a switch of its main policy rate to the overnight reverse repo rate. The overnight operations themselves only debuted in late June, so the PBOC has moved from introducing the tool to building its framework around it in about four months.
The timing is notable. China’s economy is losing momentum, with official manufacturing and services surveys both slipping into contraction in October and stocks suffering their worst month in more than a decade. A clearer, more market-based anchor gives the PBOC finer control over funding costs, and a more direct way to transmit any easing it chooses to deliver.
What about the Nasdaq? Will it rebound this week? Here’s an interesting opinion from the Exness Trading Desk (always trade at your own risk only, these are opinions, not promises):
This article was written by Eamonn Sheridan at investinglive.com.
