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China’s central bank studies an overnight policy benchmark

China’s central bank is studying a switch from its seven-day policy benchmark to an overnight rate. Governor Pan Gongsheng linked the proposal to the predominance of overnight trading in the interbank repo market. The framework remains under study, with the new operating rate to be announced when the benchmark changes, rather than an interest-rate cut already taking effect.

Economics & Markets··Evening
Pan Gongsheng speaks into a microphone at a plain wooden stand with the Chinese flag behind him.

Overnight trading is the proposed policy anchor

China’s central bank is studying making the overnight repo rate its main policy benchmark, governor Pan Gongsheng said. Pan described a proposal concerning the rate used to guide monetary policy and the maturity of the central bank’s main market operations.[1], [2]

The current benchmark is the seven-day reverse repo rate, adopted in 2024. Pan said overnight transactions accounted for more than 80 per cent of interbank repo turnover. The bank introduced overnight open-market operations in late June. Repo transactions provide short-term financing against securities, with the overnight rate referring to the shortest maturity in the proposal.[1]

A new operating rate awaits the benchmark change

The market’s average overnight rate was approximately 1.25 per cent, its lowest level in five months, against a seven-day policy rate of 1.4 per cent. Wang Qing of ratings firm Golden Credit Rating International said the new operating rate would be announced when the benchmark changed. The proposal therefore contains no announced rate cut based on that comparison between maturities.[1]

Loan pricing options could widen

Pan said some financially strong companies could negotiate with banks to link floating-rate loans to an overnight rate or the loan prime rate. The bank also planned to expand eligibility for its standing lending facility and was preparing a liquidity-support tool for insurers and fund managers, intended as a backstop during severe stress.[1]

References

  1. News sourceReuters / AOLChina studies making overnight rate its main policy benchmark↩1↩2↩3↩4
  2. News source21st Century Business HeraldChina studies making overnight rate its main policy benchmark↩
Central banks and the rate cycleEnergy transition and climate

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