PBOC has made overnight reverse repurchase operations a daily fixture

China's shift to an overnight policy interest rate marks a major step toward completing its price-based monetary policy framework, analysts said, helping clarify policy signals and improve their transmission across financial markets.

Since Nov 2, the People's Bank of China, the country's central bank, has made overnight reverse repurchase operations a daily fixture, replacing seven-day reverse repos as its main routine operation.

Previously conducted during select periods to meet short-term funding needs, overnight operations now take place each working day at a rate of 1.25 percent, with institutions bidding for the amounts they require.

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Wen Bin, chief economist at China Minsheng Bank, said the operations mean the overnight reverse repo rate has replaced the seven-day reverse repo rate as the PBOC's main policy rate, while seven-day operations now serve as a liquidity management tool deployed as needed.

"With that, China's price-based monetary policy framework is largely complete," Wen said, with DR001 — the overnight pledged repo rate among depository institutions — further confirmed as the central bank's target rate in the money market.

PBOC Governor Pan Gongsheng said in October that DR001 had effectively become the central bank's target rate, yet its main open market operations had a seven-day maturity — a mismatch that a shift to overnight operations would address to improve the precision of interest rate management.

According to Wen, the seven-day policy rate incorporated a term premium, meaning it reflected both the central bank's intended interest rate level and its assessment of the premium associated with seven-day funding.

Using an overnight policy rate removes that ambiguity, helping the PBOC keep DR001 close to the policy rate and transmitting clearer signals to other market interest rates, Wen said.

Lou Feipeng, a researcher at Postal Savings Bank of China, said the new framework had been implemented smoothly, with DR001 averaging about 1.28 percent from Nov 2 to Monday — roughly 3 basis points above the new policy rate.

However, DR001 has edged higher this week, reaching 1.327 percent on Wednesday, according to market tracker Wind Info.

Lou attributed the rise to changing funding conditions, including funds drawn out of the interbank market for the Singles' Day shopping festival, midmonth tax payments and government bond settlements, alongside the central bank's net liquidity withdrawals.

Zhang Xu, a fixed-income analyst at Everbright Securities, said in a note that the central bank could guide DR001 slightly higher when bond yields fall too quickly, curbing demand for borrowing to buy bonds and slowing the decline in yields. Zhang interpreted the current rise in DR001 as a signal of the central bank's policy stance.

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While analysts highlighted that the policy rate switch should not be interpreted as a rate cut, they acknowledged the scope for the PBOC to take future accommodative steps if needed, even as the US Federal Reserve may continue rate hikes in December following October's higher-than-expected inflation reading.

China retains room to adjust monetary policy in line with domestic needs despite further US interest rate increases, said May Yan, head of Asia financials research at UBS.

The renminbi's appreciation despite a widening interest rate differential with the United States shows that the gap alone does not determine exchange rate movements, she said.

Contact the writers at zhoulanxv@chinadaily.com.cn