Farewell to the 7-day Tenor: China's Monetary Policy Officially Shifts Its Anchor

A Fundamental Shift: Policy Rate to Be "Shifted" to Overnight Tenor

The Governor of the People's Bank of China sent a milestone signal viewed by the market at the 10th Financial Street Forum: the authority will study and choose an appropriate time to switch the tenor of the central bank's main open market operation instruments to overnight.

Over the past decade, the "old anchor" of China's monetary policy has been the 7-day reverse repo rate. The central bank injects base money into the market through daily operations, and this rate has also become the benchmark reference for short-term funding prices. Once switched to overnight — meaning operations and maturities take place every single day — the granularity of the central bank's regulation on the funding landscape will be elevated from "weekly level" to "daily level", or even hourly level.

This is no simple technical fine-tuning, but a fundamental restructuring of the monetary policy framework. According to international experience, the target range of the US federal funds rate and the main refinancing operations of the European Central Bank both take overnight or extremely short tenors as their anchors. This directional positioning in China means that the policy rate system is moving closer to the mainstream international standards.

The market has responded to this change rapidly and acutely. Based on analyses from securities firms and research institutions, traders have priced the new anchor expectation of the overnight reverse repo rate at around 1.25% — roughly 15 basis points lower than the current 7-day reverse repo rate. This 15 basis points may seem trivial, but under the trillions of yuan of positions in the bond market, it means significant room for cost optimization. More importantly, after the overnight rate becomes the new anchor, the central bank's regulation of market liquidity will be more sensitive and precise, which reduces the intertemporal liquidity mismatch problem that may be brought by the past 7-day operations.

Why Now? The Bond Market Correction Pauses

The answer lies in the urgent practical demand. The current valuation center of the bond market is undergoing a profound adjustment. Under the long-term low interest rate environment, institutions have allocated a large amount of long-dated assets, but have also accumulated high leverage risk and duration risk. Once concentrated redemption pressure emerges, it may trigger a chain reaction.

According to the calculation of the Yuyan Bond Market team of Industrial Securities, after the policy rate switches its anchor, the reasonable lower limit of the 10-year government bond yield may shift down to the range of 1.55% - 1.60%, and the corresponding 30-year government bond yield may touch 1.90% - 1.95%. What do these figures mean? For asset managers holding a large number of long-dated assets, if the policy rate can stabilize below this level, the interest spread space of the bond market will be reopened. Institutions can add leverage to buy bonds at lower costs and earn higher coupon yields. On the contrary, if the regulation pace does not go smoothly, this expectation may fail to materialize.

And this is exactly one of the core purposes of the "anchor switch": through the injection of lower-cost overnight funds, reduce the inter-bank borrowing cost of institutions, and keep market liquidity and the yield curve in a healthier position. Different from the past practice of relying on MLF (Medium-term Lending Facility) as the medium-term policy rate, the overnightization allows the central bank to maintain stable market liquidity at lower operating costs, and avoid the term structure distortion brought by medium and long-term operations.

Another Key Measure: Install a "Safety Cushion" for Non-Bank Institutions

If the anchor switch solves the daily liquidity pricing problem, then another arrangement announced at the same event — setting up a liquidity support tool to cope with large-scale redemptions of non-bank institutions — is a risk backstop for extreme scenarios. Specifically, the central bank will work with the State Administration of Financial Regulation and the China Securities Regulatory Commission to provide special liquidity support for non-bank institutions such as bank wealth management subsidiaries and public offering funds. The condition is that these institutions need to provide high-grade collateral to obtain emergency funds.

The logical chain of this news is very clear: when wealth management products encounter large-scale net redemptions, fund managers are forced to sell bonds for cash, bond prices fall, the net value of other products is impacted, and more redemptions follow. This is the "negative feedback run" risk that briefly emerged last year. With this tool, even facing extreme redemptions, non-bank institutions can use their high-grade assets as collateral to get funds from the central bank to meet redemption demands first, instead of being forced to sell assets at a low price in panic. This is equivalent to installing a "buffer" for the financial market when liquidity is tight.

Of course, the specific implementation rules — such as what counts as "high-grade collateral", how the quota is allocated, and when the tool will be triggered — are still in the research stage, and no formal supporting documents have been released yet. This is also the biggest uncertainty of this topic. But the announcement of this direction alone has already sent a strong stabilization signal to the market, which to a certain extent eases investors' concerns about liquidity crisis.

The Other Side of the Capital Market: Technology Financing Is Accelerating

It is worth noting that this Financial Street Forum not only discussed monetary policy tools, but also involved structural changes in the capital market. Data shows that as of the first three quarters of this year, the scale of A-share IPO fundraising has increased by about 180% compared with the same period last year, and the financing environment for technology enterprises has improved significantly. At the same time, the China Securities Regulatory Commission has approved the first batch of 18 actively managed ETFs, focusing on balanced, value and dividend strategies; the Beijing Stock Exchange has also launched the market value allocation system and supporting index products. Since the first half of the year, stock ETFs have recorded continuous net inflows totaling 190 billion yuan, and the momentum of medium and long-term capital entering the market is strong. The logic behind this series of actions is consistent: while reducing the comprehensive social financing cost, guide more capital to flow to technology innovation enterprises. The reform of the loan interest rate pricing benchmark is also deepening. At present, the DR benchmark rate loans are being intensively piloted and promoted, and this model is more sensitive to the tightness of funds, which helps to indirectly guide the reduction of the comprehensive social financing cost under normalized fund supply. This transformation will push the bank loan interest rate to shift from the single LPR reference to a more diversified benchmark system.

What to Watch Next: Five Key Observation Indicators

For fixed income investors and strategy researchers of financial institutions, the following observation indicators are worth paying attention to. First, whether the frequency of the central bank's open market operations is actually increased to the daily overnight mode — this is the first verification signal to confirm whether the anchor switch is actually implemented. Second, the release time and threshold design of the specific rules of the non-bank liquidity support tool — this will determine the probability of the tool being used in actual crises and its market deterrence. Third, the promotion scope of the DR benchmark rate loan pilot — if the loan interest rate pricing benchmark shifts from the single LPR to the more sensitive DR benchmark, it means that the financing cost on the enterprise side may be further differentiated. Fourth, whether the 10-year government bond yield can stabilize in the 1.55% - 1.60% range — this is not only the lower limit calculated by institutions, but also the market's confidence test for the effectiveness of the new anchor. Fifth, whether the continuous net inflow trend of stock ETFs can continue — whether the funding support of cumulative 190 billion yuan of continuous inflows in the past six months will be further strengthened as liquidity improves.

The core of this quiet revolution does not lie in the change of a certain figure, but in the fact that China's monetary policy is moving from rough management to refined governance. Whoever can take the lead in adapting to this new set of rules will be able to obtain excess returns in the new cycle.