China’s central bank shifted its main policy rate to an overnight lending rate on Monday. The People’s Bank of China injected 541 billion yuan into the banking system to ease funding costs. "It's effectively a red packet for financial institutions," said Zhaopeng Xing, as the move helps boost their profit margins.
Synopsis
China's central bank has implemented a major alteration to its monetary policy by establishing an overnight lending rate, which injects substantial liquidity into the banking sector. This initiative seeks to alleviate costs for financial entities and stimulate economic growth in light of increased credit risks. Experts estimate this change could lower interest rates by 15 basis points, thereby maintaining profitability among financial institutions.
SHANGHAI: China's central bank injected cash into the banking system on Monday, as it formally shifted its main policy rate to an overnight lending rate, a move analysts said would ease funding costs and support the economy.
The People's Bank of China (PBOC) injected 541 billion yuan ($81.3 billion) through overnight reverse repurchase agreements at 1.25%, according to a statement.
The central bank said last Friday that it would start to conduct overnight reverse repos every day and switch the seven-day operations to multiple rates from a single fixed one.
"The policy rate has officially shifted its anchor to the overnight rate, with the 1.25% pricing confirming the existing benchmark for funding costs," said Ming Ming, chief economist at CITIC Securities.
Analysts said the change effectively lowers the floor of China's interest-rate framework by 15 basis points, reducing borrowing costs for financial institutions.
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Although the move was not a conventional policy rate cut, it would help lower yields across the bond curve, they added.
"Judging by the initial 1.25% rate, the monetary policy stance is steering short-term interest rates downward," said Marco Sun, chief financial market analyst at MUFG (China).
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 is to stabilise profitability in the financial sector and strengthen its capacity to absorb risks," he added, noting the measure is unlikely to have a material impact on the stock market.
Separately, Chinese regulators, including the central bank, will hold meetings with financial institutions on Monday to discuss tools to support capital markets, media reported, as turbulence in stocks and bonds fuels calls for policy support.
The PBOC said last month that it was considering making the overnight reverse repurchase rate its main policy rate, in an effort to improve the transmission of monetary policy and support economic growth.