PBOC Tightens Control Over Short-Term Interest Rates

China’s central bank, the People’s Bank of China (PBOC), has announced that it will begin conducting temporary bond repurchase or reverse repurchase operations in the afternoon in addition to its traditional morning operations.

This move aims to tighten control over short-term interest rates and ensure reasonable and sufficient liquidity in the banking system.

Operational Details by PBOC:

The PBOC will conduct these afternoon operations “depending on the market situation” between 4 p.m. and 4:20 p.m. each working day.

The duration of these extra operations will be overnight, with fixed rates set at a seven-day reverse repo rate minus 20 basis points and 50 basis points. This effectively narrows China’s interest rate corridor from nearly 250 to 70 basis points.

Aims and Expected Outcomes:

The central bank’s objective is to improve the precision and effectiveness of open market operations. By introducing these additional operations, the PBOC aims to reduce interbank rate volatility.

This reduction in volatility is expected to make the rate more widely used as a benchmark reference rate across most asset and liability pricing, including deposit and loan rates.

Recent Bond Market Developments:

This move follows a hint from PBOC Governor Pan Gongsheng last month regarding interest-rate reform. He indicated that the bank might think about moving to a single short-term rate to guide markets and narrow the interest rate corridor within which market rates are allowed to fluctuate.

In a related move, the PBOC recently announced that it now has hundreds of billions of yuan worth of government securities available for borrowing and selling, depending on market conditions. This step is part of a broader strategy to manage liquidity in the financial system more effectively.

Market Impact:

China’s sovereign bonds have surged this year due to the country’s gloomy economic outlook and expectations for interest rate cuts.

The lack of attractive alternatives and a shift from savings to financial investments have increased demand, leading to warnings from the PBOC about the risks of a bond bubble, particularly in longer-dated debt.

President Xi Jinping’s speech brought the idea of the PBOC trading bonds as a liquidity management tool to attention, signaling a potential long-term plan for better liquidity management.