China: PBOC is to add overnight OMO

Research evidence excerpt

China: PBOC is to add overnight OMO

l be triggered when DR001 consistently

deviates from corresponding operational rates.

• The operation time window for temporary overnight facilities will be adjusted to 15:00-

15:30 from 16:00-16:20 on working days.

We see a few implications from the PBoC’s adjustments. First, a narrower and symmetric

corridor provides clearer policy signals and enhances the transmission of monetary policy.

Second, a downward shift of the corridor does not necessarily entail a signal of outright

easing, but the shift indicates that the PBoC’s tolerance for ample liquidity has marginally

increased, especially as DR001 in April-May was very close to the previous lower bound

of 1.2%, which prompted the PBoC to withdraw some medium-term liquidity. Third, the

time window adjustment gives institutions more time to match positions and suppress

sharp intraday funding fluctuations. Previously, the 16:00 slot was too close to the

interbank market close, leaving institutions with very little time for lending and

adjustments.

In the meantime, Governor Pan said the PBoC will add overnight reverse repo tools at a

proper time to better match the short-term liquidity needs of the banking system (source:

PBoC), which has set the stage for today’s announcement of overnight reverse repo

operations.

The PBoC makes a further step to formalise what the market already prices

We think today’s introduction of overnight reverse repo operations is a natural

formalisation of existing market dynamics. Overnight repos, priced off the DR001/R001

benchmark, consistently account for the predominant share of interbank repo market

transactions by volume, making the overnight rate the de facto anchor for short-term

funding costs across the Chinese financial system.