QUOTES-China central bank's deepening control on short-term rates sparks debate over policy focus

China's central bank has tightened control over short-term money markets by linking overnight borrowing costs to its benchmark seven-day reverse repo rate.

China's central bank announced on Wednesday it was deepening control over short-term money markets and tying overnight money borrowing ​costs more closely to its benchmark seven-day reverse repo rate. Short-term markets have been ​volatile recently and the move sparked debate over whether the policy ‌focus ​may eventually settle on the overnight rate. Pan Gongsheng, governor of the People's Bank of China (PBOC), told the annual Lujiazui Forum the central bank will increase the variety of overnight reverse repo operations and optimise operations for its temporary overnight repo and reverse repo agreements to better manage ‌short-term liquidity conditions.

Here are some comments from analysts and economists: LI HAO, SENIOR PORTFOLIO MANAGER, XIAMEN STILL WATER INVESTMENT MANAGEMENT, XIAMEN

"It remains unclear whether the seven-day reverse repo rate or the overnight rate will serve as the benchmark policy rate, though international comparisons suggest the overnight rate will eventually prevail. "A key concern is the stability of the overnight funding market, and any switch may have to wait ‌until the overnight DR001 stabilises, operates reliably as a market rate for a period, and gains broad acceptance."

DONG XIMIAO, CHIEF ECONOMIST, CMB-CHINA UNICOM CONSUMPTION FINANCE, SHANGHAI "Measures to improve the short-end interest ‌rate control mechanism represent a crucial step in the transition of China's monetary policy toward a price-based approach, with the core objective being to enhance the central bank's ability to precisely control short-term interest rates."

MARCO SUN, CHIEF FINANCIAL MARKET ANALYST, MUFG (CHINA), SHANGHAI "In the future, the central bank cannot limit itself to managing the banking system; it must also more directly manage market liquidity, the cost of capital, and financial market stability.

"Therefore, as I understand it, the core message of ⁠this speech is ​that the PBOC is gradually shifting from 'managing the credit ⁠cycle' to 'managing the market-driven financial cycle.'" XING ZHAOPENG, SENIOR CHINA STRATEGIST, ANZ, SHANGHAI

"These measures strengthen the seven-day reverse repo rate as the official policy benchmark. Both the interest rate corridor and the RMB Repo for foreign and international ⁠monetary authorities (FIMA) are linked to this rate. We expect overnight reverse repo operations to resemble the 14-day and 28-day tenors, with multiple rates in American auctions." WANG QING, CHIEF MACROECONOMIC ANALYST, GOLDEN CREDIT RATING INTERNATIONAL, BEIJING

"More supportive measures ​may be introduced in the future to reduce volatility in overnight interest rates. Expanding the range of overnight reverse repo operations and shifting the policy rate anchor will enhance the ⁠stability of short-end market interest rates, facilitating the transmission of monetary policy along the yield curve. However, interest rate levels themselves will not change as a result; they will continue to be driven primarily by (policy) rate hikes and cuts." MING MING, ⁠CHIEF ​ECONOMIST, CITIC SECURITIES, BEIJING

"Compared to the temporary overnight repo and reverse repo tools established in 2024, this move has, on the one hand, narrowed the upper and lower limits of the interest rate corridor, further strengthening the central bank's control over money market rates; and, on the other hand, clarified the benchmark status of the overnight rate DR001. "The statement that operations will be ⁠conducted 'when DR001 remains consistently below or above the operation rate of the corresponding tool' clarifies the proactive nature of the central bank's interest rate corridor mechanism. Furthermore, the reference to the 'operating rate ⁠of the corresponding tool' suggests that further observation is ⁠needed to determine the positioning of the overnight and seven-day reverse repo tool rates as key policy rates in the future."

ZHOU HAO, CHIEF ECONOMIST, GUOTAI JUNAN INTERNATIONAL, HONG KONG "To improve monetary policy management, the overnight rate remains more effective than the seven-day rate. In the future, the overnight ‌and seven-day rates may function ‌as a dual policy toolkit; theoretically, there should not be a significant difference between the two rates."

(Reporting ​by Shanghai Newsroom; Editing by Kate Mayberry)