PBOC schedules overnight reverse repos each day through Nov 2, following rate-signal remarks

China's interbank market should see calmer overnight funding through the end of the month as a direct result, with the 1 trillion yuan daily ceiling big enough to prevent sharp jumps in short-term rates. The rate attached to the operations, still unconfirmed, is the bigger question for markets. A level near the present overnight market rate of roughly 1.25%, lower than the 1.40% seven-day policy rate, could lead traders to view it as an early sign of a lower policy anchor; that would likely be supportive for Chinese government bonds and possibly a drag on the yuan. Should the rate instead be fixed at the top of the existing corridor, it would mostly serve as a cap and convey little policy direction. For the Australian dollar, New Zealand dollar and oil, the operations only matter if they mark the beginning of real easing that boosts Chinese demand.

One day after saying it would explore an overnight policy rate, China's central bank has begun deploying one each day, but with the price still undisclosed, markets cannot tell whether this is a rehearsal or just a safety net for month-end.

Summary:

• From 21 October to 2 November, the People's Bank of China will hold overnight reverse repo operations every day.
• The tenders will be fixed-rate and quantity-based, subject to a daily cap of 1 trillion yuan.
• Foreign-invested banks that serve as RMB settlement banks will qualify as counterparties.
• The move comes after Governor Pan Gongsheng said on Monday that the PBOC would examine making the overnight rate its main policy rate.
• The interest rate for the operations is still unannounced and will be the crucial signal.
• It remains unclear whether the operations will last beyond 2 November or are intended mainly to smooth month-end liquidity.

From 21 October through 2 November, the PBOC will conduct overnight reverse repo operations each day, a regular schedule for its newest liquidity tool that comes a day after Governor Pan Gongsheng said the central bank would consider making the overnight rate its main policy rate.

The People's Bank of China has said the tenders will be fixed-rate, quantity-based, with each day's volume capped at 1 trillion yuan. Under that system, the central bank fixes the rate and banks state the amount of funding they want at that price. Foreign-invested banks acting as yuan settlement banks will also be included.

In a reverse repo, the central bank lends to commercial banks on a short-term basis, with bonds posted as collateral. The PBOC's main policy rate at the moment is the seven-day reverse repo rate, 1.40%. Overnight operations were introduced in June inside a corridor around the seven-day rate, but until now they have been used only occasionally.

On Monday, speaking at the Financial Street Forum in Beijing, Pan said the overnight interbank rate was already, in effect, the central bank's target, and that switching policy operations to an overnight tenor would make interest rate control more precise. He also announced broader access to central bank funding for foreign bank subsidiaries, a point echoed in Tuesday's decision to include foreign-invested settlement banks.

Several important details are still unknown, above all the rate. At the corridor's upper end, the pricing would mainly cap overnight funding costs. Near the current overnight market rate of about 1.25%, it could be seen by markets as an early test of a lower policy anchor.

Whether the daily operations will be extended beyond 2 November is also uncertain. A defined window could indicate the aim is simply to smooth liquidity over month-end, when Chinese money markets can tighten. An extension would be a firmer sign of a lasting change. The PBOC has not said whether the overnight operations will coexist with the seven-day operations or eventually replace them, and the demand banks show for the facility will be telling.

The rate attached to Wednesday's first operation, together with any indication of what will follow 2 November, should provide the clearest evidence yet of how quickly the PBOC plans to adopt an overnight policy rate.