China Sets 1.25% Rate for One-Day Reverse Repo Operations and Changes Monetary Reference

The People's Bank of China (PBOC) has set the interest rate for its one-day reverse repurchase operations at 1.25%, a reference that had not been officially disclosed until now and will become central to its monetary policy framework. This decision implies a change in the liquidity management mechanism of the financial system and marks a new step in the reform of the interest rate regime of the Asian giant.

The announcement was made through a statement published on Friday, October 30. There, the monetary authority informed that the rate for one-day reverse repurchase operations will be set at 1.25%, down from the 1.4% that previously applied to seven-day reverse repurchase operations.

The difference is 15 basis points and represents a lower level than the previous monetary reference. Although the People's Bank of China had already used a rate of 1.25% during the first operation of this type, conducted at the end of June, it had not publicly communicated the cost of that tool until now.

The decision is part of a broader transformation of the instruments used by the central bank to manage liquidity and guide short-term interest rates. Starting Monday, November 2, the agency will begin conducting one-day reverse repurchase operations on all business days.

How the People's Bank of China’s Rate Scheme Changes

The new mechanism also includes modifications to the seven-day reverse repurchase operations. Instead of maintaining a single fixed rate, these transactions will now be conducted through fixed-quantity tenders and multiple rates, with allocations at different interest levels.

Additionally, these operations will no longer occur daily and will mainly be concentrated at specific times, such as tax payment periods and month-end closures, when greater liquidity needs are typically recorded in the financial market.

Another change will affect the tools that until now referenced the seven-day rate. These include temporary repurchase and reverse repurchase operations, as well as instruments aimed at foreign central bank institutions. From now on, their rates will be calculated based on the new cost of one-day operations, although existing differentials will remain.

The official goal is to improve the precision of control over short-term interest rates and strengthen the transmission of monetary policy throughout the financial system.

The Impact on Liquidity and Bond Markets

The modification comes in a context of increased tension in Chinese financial markets. During October, the CSI 300 index recorded its largest monthly drop in over a decade, after entering bear territory at the beginning of the month.

The debt market also experienced days of volatility. The yields on ten-year Chinese government bonds rose to as high as 1.64%, while 30-year debt futures recorded their worst daily drop since March. Among the concerns were the financial difficulties of the state developer Zhuhai Huafa Group and worries related to credit risk.

In this scenario, some investors interpreted the new rate as a signal of monetary easing, given that 1.25% is below the previous reference. However, the People's Bank of China avoided presenting the modification as a conventional interest rate cut.

Economists from Goldman Sachs noted that, although it does not represent a traditional reduction of 15 basis points in the official rate, the change could increase interbank liquidity and help reduce bond yields, as long as the rest of the market conditions remain stable.

For her part, Xiaojia Zhi, chief economist at Crédit Agricole CIB, considered that the announcement came earlier than some analysts expected and could help lower short-term rates in the money market.

The reform also aims to align the operations of the People's Bank of China with those of other major central banks, which use one-day interest rates as the main reference for conducting monetary policy. This is a gradual transformation process aimed at improving the functioning of the financial market and strengthening the transmission mechanisms of the institution's decisions.

Thus, the public setting of 1.25% not only provides transparency regarding a tool that until now did not have an officially communicated rate but also consolidates the Chinese central bank's shift towards a liquidity management scheme based on short-term operations.