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Amanda Lee

China’s central bank will step in to take control of interest rates with additional open market operations from Monday, while also tightening the band within which short-term interest rates can fluctuate.
The People’s Bank of China will conduct temporary bond repurchases or reverse repurchases to make open market operations more efficient and keep banking system liquidity ample.
The additional operations would be conducted “depending on the market situation” between 4pm and 4.20pm each working day, the People’s Bank of China said on Monday.
The term of the temporary repos and reverse repos would be overnight, and rates would be set at 20 basis points below and 50 basis points above the seven-day reverse repo rate, according to the central bank.
The yield of China’s 30-year government bond rebounded quickly following PBOC’s statement on Monday morning, surging to as high as 2.526 per cent after opening at 2.493 per cent, before stabilising to 2.51 per cent in the early afternoon.
Analysts believe the move paves the way for a new and narrower interest rate corridor, with the seven-day reverse repo rate serving as a main policy rate, giving the central bank more leeway to manage cash conditions and interest rates amid increased demand for bonds, which have sent yields to record lows.




In particular, tightening the band within which short-term rates can fluctuate would help manage liquidity in an event of a bond sale, Huachuang Securities said on Monday.
A narrow interest rate corridor would help to ensure more stable and predictable short-term rates to enhance monetary transmission.
“After all, if the central bank sells bonds, it may lead to liquidity tension, so the interest rate corridor ceiling actually provides a supplement to the central bank’s operations,” Huachuang Securities said.
The latest announcement came shortly after the PBOC said it had hundreds of billions of yuan worth of bonds at its disposal to borrow, and would sell them depending on market conditions, according to a report by the state-backed Shanghai Securities Journal on Friday.
It was the strongest signal from the central bank that it may be contemplating selling securities to cool a market rally, driven by strong demand for safe haven assets by Chinese investors – seen by PBOC as a financial stability risk.
Julian Evans-Pritchard, head of China economics at Capital Economics, said that the trend of plunging long-term bond yields is unlikely to turnaround even if the PBOC began to buy and sell bonds in the secondary market.
The best the PBOC can probably hope to achieve is to stabilise yields around current levels for a few quarters, but not indefinitely
Julian Evans-Pritchard, Capital Economics
“In contrast to the PBOC’s view, we think the forces pushing down long-term yields are mostly structural and doubt they will reverse any time soon,” Evans-Pritchard said on Friday.
“China appears to be heading for a sustained period of near-zero inflation and weakening trend growth which, coupled with a high debt burden, points to further declines in nominal rates over the medium-term.
“If we are right, then the best the PBOC can probably hope to achieve is to stabilise yields around current levels for a few quarters, but not indefinitely.”
PBOC governor Pan Gongsheng said last month at a forum in Shanghai that the central bank would reform interest rate policies to improve transmission, including an “appropriately” narrowed interest rate corridor.
Pan also warned of the risks of nonbank financial entities holding a large amount of medium- to long-term central government bonds, which he said could create a maturity mismatch and interest rate risk.
Pan cited the collapse of Silicon Valley Bank in the United States after a rapid rise in interest rates by the US Federal Reserve starting in 2022, and vowed to maintain an upwards sloping yield curve.


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Analysts believe moves by the People’s Bank of China to conduct additional open market operations paves the way for a new and narrower interest rate corridor


Analysts believe moves by the People’s Bank of China to conduct additional open market operations paves the way for a new and narrower interest rate corridor.


China economy

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