In 2024, the People's Bank of China (PBoC) implemented major reforms to its monetary policy framework to increase the effectiveness of policy transmission and better support economic growth.
Move to the 7-day Repo Rate as the primary policy rate:
Traditionally, the PBoC has used several policy levels, including the Medium Term Lending Facility (MLF) and Primary Lending rates (LPR), to influence market liquidity and interest rates. In June 2024, Governor Pan Gongsheng announced a strategic shift, naming the 7-day reverse repurchase rate (repo) as the main short-term policy rate. This decision aimed to streamline the monetary policy framework and improve the transmission of policy signals to the wider economy.
The 7-day reverse repo rate is critical to the PBoC's open market operations, where it provides short-term liquidity to commercial banks. By targeting this level, the PBoC seeks to have a more direct impact on short-term market interest rates, thus increasing the responsiveness of financial institutions to policy changes.
Changes to Policy Rates:
In line with this new framework, the PBoC made several rate changes:
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July 2024: The 7-day reverse repo rate was reduced by 10 basis points from 1.8% to 1.7%.
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September 2024: The rate was further lowered by 20 basis points to 1.5%, marking the lowest level recorded since at least 2012.
These reductions were intended to reduce borrowing costs and stimulate economic activity amid signs of an economic slowdown.
Changes to the LPR and MLF settlement dates:
The PBoC also reformed the methods for setting the Primary Lending Rate (LPR) and Medium Term Lending Facility (MLF) levels to align with the new policy framework:
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Loan Prime Rate (LPR): Previously, the LPR was closely linked to the MLF level. With the move to the 7-day reverse repo rate as the key policy rate, the PBoC aimed to reform the LPR setting mechanism to better reflect market rates and improve monetary policy transmission.
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Medium Term Loan Facility (MLF): The PBoC changed the timing of its MLF operations, extending them beyond normal and providing liquidity through open market operations. This approach was part of the broader strategy to reduce the exposure of the MLF rate to the 7-day reverse repo rate.
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In October 2024 the PBOC cut the one-year LPR to 3.1% and the five-year LPR to 3.6%.
This is year 1, graph via Trading Economics:
While I say these LPRs are not that relevant, they still are. Most new and outstanding loans in China are based on the one-year LPR, while the five-year rate affects mortgage prices.
