China's central bank will consider shifting its main money market operations from seven days to overnight to improve control of borrowing costs, the People's Bank of China said in a speech published Oct. 21.
The overnight rate is already its effective target, the central bank said in “Thoughts on several issues of interest to the market.” This creates a mismatch with its main operations. The Bank for International Settlements published the speech in its central bankers' speeches series.
The central bank said an overnight rate would become its main policy rate when it made the change, but gave no timetable beyond saying it would act when appropriate.
Drawing on changes over the past two years, the central bank said China had established a more market-based system for adjusting interest rates. It had clarified its policy rate, added overnight operations and begun trading government bonds.
The central bank said it would also broaden the benchmarks banks use to price loans beyond the loan prime rate, a reference rate for borrowing costs. Some lenders and customers have already agreed to use market rates for floating-rate loans, it said.
Financially strong companies could negotiate loans linked to the overnight rate or the loan prime rate, the central bank said. The latter could remain the benchmark for small businesses and individuals.
The central bank also said it would phase out its old benchmark deposit and lending rates, which have remained unchanged since October 2015. Market-based alternatives had gradually replaced them.
Alongside those changes, the central bank announced plans for emergency financing to help non-bank financial institutions meet large withdrawals during market-wide funding stress. The facility would address a cycle in which withdrawals force bond sales that prompt further withdrawals.
The central bank said eligible institutions would include banks' wealth management subsidiaries, public fund managers and their parent banks and securities firms. Borrowers would have to provide high-quality collateral and meet financial stability requirements.
The central bank said those conditions aimed to preserve market discipline and prevent expectations that every institution would receive support. It would publish operating details in future announcements.
The central bank also said it would extend its Standing Lending Facility, which provides temporary funding against collateral, to eligible foreign banks incorporated in mainland China. Chinese banks licensed to operate across the mainland would also gain access, bringing all deposit-taking institutions within its coverage, it said.
Separately, the central bank said a pilot would let eight offshore yuan clearing banks trade the currency for their own accounts in China's interbank foreign exchange market. It would assess the pilot before opening the market further as needed.
