According to the central bank, the tenor for the temporary and reverse repos will be overnight and the interest rates will be set 20 basis points lower and 50 basis points higher than the seven-day reverse repo rate.
Following the People's Bank of China's statement Monday morning, yields on China's 30-year government bonds rebounded quickly, opening at 2.493% before surging to 2.526% before stabilizing at 2.51% by early afternoon.
Analysts say the move will make the seven-day reverse repurchase rate the main policy rate, creating a new narrow range for interest rates, giving the central bank more room to manage liquidity and interest rates at a time when rising demand for bonds has pushed yields to record lows.
Huachuang Securities said on Monday that narrowing the fluctuation band of short-term interest rates in particular would help manage liquidity when selling bonds.
A narrower interest rate band would increase the stability and predictability of short-term interest rates and enhance the transmission of monetary policy.
“After all, the interest rate corridor cap actually complements the central bank's operations, as the central bank's bond sales could lead to a liquidity crunch,” Huachuang Securities said.
The announcement came just before the PBOC said it had access to hundreds of billions of yuan worth of bonds and would sell them depending on market conditions, the state-run Shanghai Securities News reported on Friday.
It was the strongest signal yet from the central bank that it may be considering selling securities to tamp down a market rally driven by strong demand for safe assets by Chinese investors that it sees as a financial stability risk.
Julian Evans-Pritchard, head of China economics at Capital Economics, said the sharp decline in long-term bond yields is unlikely to be reversed even if the PBOC starts buying and selling bonds in the secondary market. The best the PBOC can achieve is to stabilize yields around current levels for a few quarters, but not indefinitely. Julian Evans-Pritchard, Capital Economics
“Contrary to the PBOC's view, we believe the forces pushing down longer-term interest rates are primarily structural and are unlikely to reverse in the near term,” Evans-Pritchard said on Friday.
“China appears to be heading for a sustained period of near-zero inflation and weakening growth trends. This, combined with high debt burdens, points to further declines in nominal interest rates over the medium term.”
“If we're right, the best we can hope for from the People's Bank of China is to stabilize yields around current levels, perhaps for a few quarters, but not indefinitely.”
People's Bank of China Governor Pan Gongsheng said at a forum in Shanghai last month that the central bank would reform monetary policy to improve spillover effects, including by narrowing interest rate bands “appropriately.”
Pan also warned about the risks of non-bank financial institutions holding large amounts of medium- to long-term central government bonds, which he said could create maturity mismatch and interest rate risks.
Pan vowed to keep the yield curve on an upward trajectory, citing the collapse of Silicon Valley Bank in the United States after the Federal Reserve sharply raised interest rates from 2022.
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