China shifts to short-term tools in monetary policy overhaul: Nomura
China is reshaping its monetary policy, shifting from the medium-term lending facility to short-term tools like the 7-day reverse repo rate. The PBoC is creating a narrower interest rate corridor and using DR001 as a key benchmark. However, policy transmission remains weak, and open market operations are still developing amid lingering challenges.
The People's Bank of China (PBoC) has de-emphasised the one-year medium-term lending facility (MLF), instead elevating the seven-day open market operations (OMO) reverse repo rate as the primary policy rate, according to Nomura.
To enhance clarity and improve rate transmission, the PBoC is establishing a narrower interest rate corridor with temporary overnight repo rates acting as the floor and reverse repo rates as the ceiling. The DR001 rate—overnight repo for depository institutions—has emerged as a key interbank benchmark.
The shift comes amid growing limitations of the MLF, which has constrained bond market liquidity by tying up large volumes of Chinese government bonds (CGBs) at the central bank. In response, the PBoC resumed direct CGB trading and launched outright reverse repos to manage liquidity more efficiently.
Despite this shift, challenges remain. The PBoC does not commit to unlimited lending at the corridor's ceiling. Transmission from policy and interbank rates to bank lending and deposit rates remains weak, with window guidance still critical. Open market operations are also in a formative stage, as shown by the suspension of CGB purchases shortly after resumption.
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