The increasing emphasis by the People’s Bank of China (PBoC, the central bank) on overnight money market interest rates is fueling speculation that the authority may select this tenor as its primary policy operating target instead of the traditional seven-day tenor.
In its monthly report released late on 11 February, the PBoC implemented a structural change unprecedented in at least two decades: placing analysis of the money market in the top priority position, even ahead of the bond market section.
Notably, the report added a detailed analytical section on pledged bond repurchase (repo) rates, particularly comparing overnight repo costs with the seven-day reverse repo rate.
This move closely follows the PBoC’s commitment in its quarterly report released on 10 February to “guide short-term market interest rates to fluctuate more closely around the policy rate.”
Analysts assess this as an important transitional step in the PBoC’s roadmap to modernize its monetary framework initiated in 2024. Mr. Ding Shuang, economist at Standard Chartered, stated that maintaining market rates close to the policy rate is a prerequisite for moving toward a narrower interest rate corridor.
In 2025, China’s weighted average overnight repo rate reached 1.46% (down 0.19 percentage points). The sharper decline in repo rates compared with the reduction in the policy rate (0.1 percentage point) indicates that the PBoC is managing liquidity extremely effectively to maintain low borrowing costs.
The shift from large-scale interest rate adjustments to granular liquidity management through short-term rates enables the PBoC to move closer to the operating style of the Federal Reserve (Fed).
Sun Binbin, analyst at Caitong Securities, believes that the PBoC may soon conduct overnight reverse repo operations to establish a new policy rate.
According to analysts at China Minsheng Bank, targeting the overnight rate would be significantly more effective due to the enormous transaction volume of this market, thereby increasing the speed and precision of policy transmission.
Although the signals have become clearer, analysts forecast that the PBoC will maintain caution and closely monitor market developments before officially announcing any breakthrough changes in its operating mechanism./.
