Key facts
- China's central bank initiated overnight reverse repo operations.
- The People's Bank of China offered 300 billion yuan in its first overnight reverse repo operation.
- Sources reported the inaugural overnight rate was 1.25%.
- The PBOC also conducted seven-day reverse repos, injecting 157.5 billion yuan at an unchanged rate of 1.4%.
- The move is seen as a way to better manage liquidity and reduce money market volatility.
China's central bank, the People's Bank of China (PBOC), has introduced overnight reverse repo operations, a move interpreted by markets as a deepening of its control over liquidity conditions and an alignment with global central banking practices. The PBOC stated it conducted these operations for the first time, offering 300 billion yuan ($44.10 billion) to financial institutions. Sources familiar with the matter indicated that the inaugural overnight reverse repo rate was set at 1.25%, which is 15 basis points lower than the seven-day reverse repo rate.
The PBOC also injected 157.5 billion yuan through seven-day reverse repos, maintaining the rate at 1.4%. The benchmark overnight repo rate traded in the interbank market was 1.3533% on Monday, down approximately 2 basis points from the previous day.
Analysts suggest that by not publicly announcing the overnight rate, the PBOC aims to preserve the signaling effect of its seven-day policy rate and avoid confusion about potential rate cuts. The introduction of the overnight rate is expected to help the central bank better manage liquidity, especially during periods of volatility at month- and quarter-ends, and enhance the effectiveness of monetary policy transmission.
PBOC Governor Pan Gongsheng had earlier this month expressed the central bank's intention to increase the variety of overnight reverse repo operations and narrow the range of short-term rates to reduce money market volatility. Industry experts cited by Financial News noted that strengthening control over short-term interest rates, given the dominance of overnight interbank lending, can improve monetary policy effectiveness.