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China has shifted its money-market target rate to overnight from one-week and announced it will step up liquidity injections in the next few days, in a sign of tighter control and deeper involvement in managing super short-term interest rates.
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The move comes as China emphasises stability in a debt market that started to resume a long rally powered by a softening growth outlook and abundant liquidity in a banking system flush with household savings.
"Rather than the monetary policy stance itself, we believe the key policy development is the formal transition" to a framework centred on the overnight money market rate, analysts at Barclays said in a note.
The overnight rate is now "more clearly established as the People's Bank of China's (PBOC) key policy anchor", they said, adding that tighter control of short-term rates should make funding conditions more stable and predictable.
For the past three days, dealers have not used the routine seven-day repo facility at all, the PBOC said on Thursday, and sovereign yields at 10- and 30-year tenors have sunk toward two- and nine-month lows, respectively, suggesting the market is flush with cash.
On Wednesday, the PBOC said that it would conduct up to 600 billion yuan (HK$698 billion) worth of overnight reverse repos per day on August 14 and August 17-19.
"The decision to reduce seven-day reverse repo operations to zero again was aimed at guarding against herd behavior in the bond market," said Zhang Liang, an analyst at SDIC Securities.
"At the same time, with the tax payment period approaching, the central bank's early announcement of overnight reverse repo operations will help smooth liquidity fluctuations and prevent sharp swings in money market rates."
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The last time the PBOC injected no reverse repos was in June. The central bank uses the short-term liquidity tool to fine-tune cash conditions in the country's banking system.
Separately, the PBOC pledged in a quarterly monetary policy report released late Wednesday to conduct overnight reverse repo operations more frequently, aiming to sharpen short-term interest-rate management.
"Starting in 2025, the target for short-term interest rates gradually shifted from the seven-day repo rate to the overnight tenor, and since 2026, the authorities have further signaled to the market that the target rate will shift to the overnight rate," the PBOC said in a column of the quarterly report.
Overnight repo transactions dominate China's interbank money market, accounting for about 90 percent of the repo turnover. And many overseas global central banks, such as the Federal Reserve, have already adopted overnight rates as the main policy tool to better anchor the yield curve.
"The special columns further clarified the PBOC's continued shift from quantity-based toward price-based monetary policy implementation," Xinquan Chen, China economist at Goldman Sachs, said in a note.
"As loan pricing increasingly draws on multiple benchmarks, including depository repo (DR) rates, the PBOC is likely to keep overnight money rate in a tighter range around the policy rate."
Reuters
