China lowers funding costs with shift to overnight policy rate
The move reduces borrowing costs for financial institutions
China's central bank injected liquidity into the banking system on Monday (Nov 2), officially transitioning its primary policy rate to an overnight lending rate. This shift, announced last Friday, aims to lower borrowing costs and bolster the economy. The People's Bank of China (PBOC) provided 541 billion yuan (US$81.3 billion) via overnight reverse repurchase agreements at a rate of 1.25 per cent.
Analysts note that this change effectively reduces the floor of the interest-rate framework by 15 basis points, decreasing funding costs for financial institutions. Although not a traditional rate cut, this move is expected to lower yields across the bond curve. The shift comes amid credit concerns from state-owned developer Zhuhai Huafa Group, which have unsettled the bond market and pressured policymakers to bolster investor confidence.
The measure is anticipated to provide financial institutions with a 15-basis-point rate cut, enhancing their net interest margins by roughly 5 basis points. This action is intended to stabilize the financial sector's profitability and enhance its risk-absorbing capacity, though it is unlikely to significantly affect the stock market.
Chinese regulators, including the central bank, will convene meetings with financial institutions on Monday to explore tools supporting capital markets, following market turbulence that has fueled calls for policy support.
Written by urgent.news from The Business Times - Companies & Markets's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
