China’s central bank makes an overnight rate its new policy anchor and taps a swap tool to support a battered stock market

The People’s Bank of China conducted 541 billion yuan ($81.3 billion) of overnight reverse repurchase agreements on Monday at 1.25%^1,2. The central bank said the operation used fixed-rate, quantity-based bidding, and it marks a shift of its policy rate anchor to the overnight tenor⁵.

The move was described as a de facto easing⁴ and as a signal of easier funding conditions². China’s 10-year government bond yield fell after the shift⁸. The central bank kept its benchmark lending rates unchanged, with the one-year loan prime rate at 3% and the five-year rate at 3.5%⁸.

On the same day the PBOC announced a new round of operations under its securities swap facility to support the stock market⁷. It would be the third time the central bank has used the tool⁶, and the announcement followed media reports that regulators would meet on market support^3,6.

Why it matters to investors

The support push comes after a record 12-week sell-off in Chinese stocks¹⁰. The October rout sent the benchmark into a bear market¹¹.

Authorities announced a string of measures on Monday to boost liquidity, cut rates for share buy-back loans and ease curbs on leveraged trading⁹. The PBOC, the China Securities Regulatory Commission and other regulators acted after a joint meeting in Beijing, and officials signalled a determination to defend the equity market⁹. Reports beforehand said the central bank would meet major banks alongside the National Financial Regulatory Administration and the securities regulator¹².

Markets responded, though modestly. The CSI 300 index rose 0.8% to close at 4,016.92¹¹. The tech-heavy Star 50 gained 3.1%, its biggest rise since mid-September, and Shenzhen’s ChiNext rose nearly 2%^10,11. Brokers Sinolink Securities and Pacific Securities rose by the 10% daily limit, while Hong Kong stocks gained 0.4%¹⁰. Even so, the gains were described as little relief after the scale of the sell-off¹⁰.

What to watch

Traders were speculating that China would expand a relending facility worth about $45 billion¹¹. Whether that happens, and on what scale, will show how far Beijing is willing to go in using central bank funding for equities.

The new overnight anchor also changes how markets read Chinese monetary policy. Investors will watch whether the PBOC keeps the overnight rate at 1.25% and whether loan prime rates, unchanged on Monday, follow lower^1,8.