China Shifts Its Main Policy Rate as Central Bank Injects 541 Billion Yuan

China's central bank injected 541 billion yuan, about 81.3 billion dollars, into the banking system on Monday through overnight reverse repurchase agreements at 1.25 percent, as it formally shifted its main policy rate to an overnight lending rate.

The People's Bank of China said on Friday that it would start to conduct overnight reverse repos every day and switch its seven-day operations to multiple rates from a single fixed one. Analysts said the change would ease funding conditions and support the economy.

"The policy rate has officially shifted its anchor to the overnight rate, with the 1.25 percent pricing confirming the existing benchmark for funding costs," said Ming Ming, chief economist at CITIC Securities, according to Reuters.

Analysts said the shift effectively lowers the floor of China's interest rate framework by 15 basis points, reducing borrowing costs for financial institutions. It was not a conventional policy rate cut, they added, but it would help lower yields across the bond curve.

"Judging by the initial 1.25 percent rate, the monetary policy stance is steering short-term interest rates downward," said Marco Sun, chief financial market analyst at MUFG (China).

Why the bank moved now

The shift comes as credit concerns from state-owned developer Zhuhai Huafa Group have unsettled the bond market and added pressure on policymakers to shore up investor confidence.

Zhaopeng Xing, senior China strategist at ANZ, said the move was equivalent to a targeted 15 basis point rate cut for financial institutions. "It's effectively a red packet for financial institutions, boosting their net interest margins by about 5 basis points," Xing said. The aim, he added, is to stabilise profitability in the financial sector and strengthen its capacity to absorb risks, and the measure is unlikely to have a material impact on the stock market.

Separately, Chinese regulators, including the central bank, were set to hold meetings with financial institutions on Monday to discuss tools to support capital markets, as turbulence in stocks and bonds fuels calls for policy support. China's battered blue chips gained 1.3 percent on Monday after reports of the meetings.

Citi analysts took a cooler view. The transition was "a mark-to-market adjustment rather than a de facto rate cut," they said in a note, and they do not expect a loan prime rate cut to follow in November. They continue to see 2027 as the more likely window for rate cuts.

The PBOC said last month that it was considering making the overnight reverse repurchase rate its main policy rate, in an effort to improve how monetary policy reaches the economy and to support growth. Reuters put the exchange rate at 6.6538 yuan to the dollar.

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