PBoC's rate corridor at the short end

The PBoC has several instruments for managing short-term liquidity, bank reserves, open market operations (OMOs), including short-term liquidity operations (SLOs), and standing lending facilities (SLFs). The rates on these instruments are candidates for forming a rate corridor.

In April 2014, the PBoC signalled its intention for the rates on SLFs to form the ceiling1, but made no mention of its likely choice for the floor. During the latest implementation in Q1, SLF rates stood at 4.5% for overnight and 5.5% for 7-day for those institutions that meet the PBoC's macro-prudential criteria, and 100bp higher for those which fall short.

Throughout Q2 and Q3, there was no use of the SLF. Candidates for the floor include the rate on excess reserves and the rates on the PBoC's repo operations. The rate on excess reserves is only 0.72%, probably much lower than what the PBoC would want for the floor level. 

The latest repo operation was in December 2014, with a14-day duration and a rate of 3.2%. The situation has changed since then and it is difficult to gauge where the bottom is at the moment. Regardless, the levels of SLF rates already suggest quite a wide band, given that market rates (i.e. repo rates) are around 2% and 2.5% currently.

The large width of the potential corridor probably will make it necessary for the PBoC to select a rate in the middle for communication and additional guidance. This rate could be the headline policy rate. 

"The most likely candidate is the 7-day reverse repo rate, it has been the most frequently conducted for operations and was lowered to 2.35% at the end of August from 2.5% in June", says Societe Generale.