New plan for relaxation in the Central Bank of China

The People's Bank of China (PBOC) has signaled that the overnight reverse repo rate will become the new policy indicator, replacing the current seven-day rate.

This step stands out as another move that brings the bank closer to its global peers and has the potential to reduce borrowing costs.

According to a PBOC-affiliated newspaper, Governor Pan Gongsheng said at the Financial Street Forum in Beijing on Monday that the central bank will examine the possibility of switching the main maturity of open market operations to overnight maturity at an appropriate time. Pan stated that once this happens, the overnight reverse repo rate will become the bank's main policy lever, Financial News reported.

With the rate on new overnight reverse repo transactions set to be 1.25 percent in June, some economists will consider this transition as a de facto interest rate cut, as it is lower than the current seven-day benchmark. Before the announcement, Huatai Securities analysts led by Zhang Jiqiang wrote that such a change would "serve as a de facto interest rate cut."

Market impacts, corridor regulation and financial responses

According to Financial News, Pan said that overnight repos are the most heavily traded product in the interbank money market and their rates, known as DR001, have become the target of PBOC's operations.

These agreements reflect the cost of borrowing from each other on an overnight basis by using banks' bonds as collateral.

Australia & New Zealand Banking Group Ltd. Senior China strategist Xing Zhaopeng stated that although the rate level remains uncertain, the latest decision will "significantly change the policy framework and the market."

Xing said that if the overnight reverse repo rate remains below 1.4 percent, "existing interest rate corridors will be recalibrated." Since the interbank overnight repo rate is currently below 1.3 percent, an overnight reverse repo rate of 1.25 percent seems possible, according to Xing. The overnight repo rate remained flat at 1.26 percent after the news.

In the offshore market, the yuan rose 0.1 percent against the dollar to 6.6813, maintaining its previous gains. The yields of the government's 10-year and 30-year bonds remained almost unchanged at 1.64 percent and 2.06 percent, respectively.