On July 15th, a press conference was held by the State Council Information Office where Zou Lan, a spokesperson and Deputy Governor of the People's Bank of China, elaborated on two specific measures to improve the short-term interest rate control mechanism.

Improving the Temporary Repo Facility Framework

The first measure involves refining the operational mechanism for temporary repurchase and reverse repurchase facilities. These facilities establish an interest rate corridor. When short-term market rates persistently breach this corridor, the central bank will promptly conduct necessary liquidity operations, which can effectively reduce market rate volatility. This round of optimization primarily includes three aspects. First, the operational interest rates have been adjusted. Previously, the rates for temporary repos and reverse repos were set at 20 basis points below and 50 basis points above the policy rate, respectively, creating a 70-basis-point width. This has now been optimized to a symmetrical corridor of 25 basis points on either side of the policy rate, narrowing it to 50 basis points. This adjustment reflects both the increased stability of short-term money market rates and the central bank's pursuit of more precise control over them. Second, the trigger conditions have been made more explicit. When the overnight repo rate (DR001) persistently breaks through the temporary repo operation rate, the People's Bank of China will initiate corresponding operations to guide the DR001 back within the corridor. Third, the operation time window has been advanced. The operation time for temporary repos and reverse repos has been optimized to 3:00 PM - 3:30 PM, one hour earlier than before. This change primarily responds to the needs of primary dealers, giving financial institutions more time to react and better aligning with the trading convention where repo transactions are concentrated before 3:30 PM.

Introducing an Overnight Reverse Repo Operation

The second measure is to add an overnight reverse repo operation to the regular open market operations. In recent years, overnight transactions have accounted for nearly 90% of money market repo trading, making overnight financing a crucial tool for financial institutions' liquidity management. Market demand is significant, especially during periods of high short-term demand volatility like month-ends. To further refine the interest rate control framework and enrich the maturity spectrum of available tools, the People's Bank of China has introduced overnight reverse repo operations. This better matches the short-term liquidity needs of financial institutions. The first such operations were conducted at the end of June, with amounts of 300 billion yuan and 600 billion yuan on June 29th and 30th, respectively. Overnight reverse repo operations can play a role in "peak shaving and valley filling" during special periods. Some institutions may have liquidity needs lasting only two or three days. If the central bank only conducts 7-day reverse repos, liquidity could become somewhat congested. Conducting overnight reverse repos in such scenarios can improve liquidity management efficiency and lower costs for financial institutions. Currently, the focus of overnight reverse repo operations is not on the interest rate but on their ability to regulate ultra-short-term liquidity. At this stage, the 7-day reverse repo operation rate remains the primary policy rate, which, based on practical results, has effectively served as an anchor for market pricing.

Zou Lan stated that these two measures are conducive to enhancing the precision and effectiveness of the central bank's liquidity management and short-term interest rate control. Following their implementation, short-term rates have operated stably. At the end of June, the overnight rate (DR001) was 1.36%, which represents relatively low volatility compared to quarter-end periods in recent years.

Zou Lan further explained that the volume of open market operations can vary significantly, and the maturity types are diverse. This is mainly because the factors affecting bank liquidity supply and demand are complex, with fiscal revenues and expenditures, reserve requirement payments, and cash injections all having important influences. The People's Bank of China will comprehensively consider changes in these factors, reasonably arranging the types and scales of open market operations. Sometimes liquidity will be drained, and sometimes it will be injected, with the ultimate goal of maintaining the total liquidity at an appropriate level, thereby promoting the stable operation of short-term rates around the policy rate. The volume of any single operation serves the needs of total liquidity regulation, and it is not appropriate to judge the central bank's policy stance based on the volume of individual operations. Compared to the central bank's operational volume, the level of short-term market interest rates is a more suitable observation indicator.

Zou Lan stated that going forward, the People's Bank of China will continue to steadily and orderly advance the reform and improvement of the monetary policy operational framework to better guide the market's overnight rate to operate stably near the policy rate. In line with the needs of primary dealers, the central bank will study gradually increasing the frequency of overnight reverse repo operations and maintain good communication with the market.