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On July 22, the People's Bank of China (hereinafter referred to as the "PBOC") issued an open market business announcement stating that in order to optimize the open market operation mechanism, from now on, the 7-day reverse repurchase operation in the open market will be adjusted to a fixed interest rate and quantity bidding. At the same time, in order to further strengthen counter-cyclical regulation and increase financial support for the real economy, from now on, the interest rate of the 7-day reverse repurchase operation in the open market will be adjusted from the previous 1.8% to 1.7%.

A person close to the central bank told the Securities Times that the adjustment of the 7-day reverse repurchase operation to a fixed interest rate and quantity bidding, which explicitly indicates the open market operation interest rate, is conducive to strengthening the policy attributes of the 7-day reverse repurchase rate. The 10 basis point reduction in the 7-day reverse repurchase operation interest rate is conducive to increasing financial support for the real economy, but it does not mean that the downward space of long-term bond yields has opened up.

Authoritative experts said that the reduction in policy interest rates is expected to be gradually transmitted to the real economy through the financial market, promoting the reduction of comprehensive financing costs, consolidating the upward trend of the economy, and breaking the negative cycle of downward long-term bond yields and weakening expectations.

The central bank's reduction in the 7-day reverse repurchase operation rate is intended to increase countercyclical regulation and smooth out short-term economic fluctuations; while medium- and long-term bond yields reflect more of the long-term economic trends and should be evaluated from a cross-cycle perspective.

01‍

A fixed interest rate will be adopted

From now on, the 7-day reverse repurchase operation in the open market will be adjusted to a fixed rate and quantity bidding.

A person close to the central bank told a Securities Times reporter that explicitly stating the open market operation interest rate will help strengthen the policy attributes of the 7-day reverse repurchase rate.

Open market bidding methods include price bidding and quantity bidding. The winning bid price of the former is determined by the game between supply and demand parties, which is theoretically uncertain, while the price of the latter is given.

In the past, the central bank's open market 7-day reverse repurchase operations adopted price bidding. Although the winning bid rate remained unchanged most of the time, operations still needed to be carried out daily to release clear interest rate signals.

Considering that the 7-day reverse repurchase operation rate in the open market has basically assumed the function of the main policy interest rate, in order to enhance the authority of the policy interest rate and effectively stabilize market expectations, it is necessary to optimize the bidding method to a fixed rate and quantity bidding, and explicitly indicate the operating interest rate. This is also a reflection of a sound market-oriented interest rate regulation mechanism.

02

The operating rate was lowered by 10 basis points

Starting today, the interest rate for 7-day open market reverse repurchase operations will be adjusted from the previous 1.8% to 1.7%.

A person close to the central bank told a Securities Times reporter that a 10 basis point reduction in the 7-day reverse repurchase operation rate will help increase financial support for the real economy.

In addition to the adjustment of the bidding method, the interest rate of this open market 7-day reverse repurchase operation was also reduced from the previous 1.8% to 1.7%, which is the first adjustment since August 2023.

Data released earlier by the National Bureau of Statistics showed that my country's GDP grew by 4.7% year-on-year in the second quarter, slowing down from the first quarter, especially the weak recovery of residents' consumption.

The central bank's decisive interest rate cut this time demonstrated the determination of monetary policy to protect economic recovery, and was an active response to the requirement of the Third Plenary Session of the 20th CPC Central Committee to "unswervingly achieve the annual economic and social development goals."

Experts said that the reduction in policy interest rates is expected to be gradually transmitted to the real economy through the financial market, promoting the reduction of comprehensive financing costs, consolidating the upward trend of the economy, and breaking the negative cycle of downward long-term bond yields and weakening expectations.

The decline in the 7-day reverse repo rate does not mean that the long-term bond yield has room to fall. The central bank lowered the 7-day reverse repo rate this time to increase counter-cyclical regulation and smooth out short-term economic fluctuations; while the medium- and long-term bond yields reflect more long-term economic trends and should be evaluated from a cross-cycle perspective.

Industry insiders analyzed that the continued decline in this round of long-term bond interest rates has already included expectations for this interest rate cut, and even has a significant overshoot, which does not mean that it needs to continue to fall following the decline in the 7-day reverse repurchase operation interest rate.

In fact, the current long-term bond interest rate is too low, and foreign media are generally concerned about the potential risks therein; too low long-term bond interest rates can easily lead to the self-realization of weak expectations, while the fundamentals of my country's economy are improving in the long run.

The central bank's interest rate cut will help support the economic recovery, boost medium- and long-term economic expectations, and help drive the recovery of long-term interest rates. It is expected that the central bank will also adopt comprehensive measures in the future, borrow and sell government bonds when necessary, timely correct and block the accumulation of bond market risks, and maintain a normal upward-sloping yield curve. The central bank is determined and has measures to stabilize market expectations.

Source: Securities Times

Editor: Chen Lixiang

Proofreading: Liu Rongzhi