Core Viewpoint - The People's Bank of China has announced a change in the operation of the 14-day reverse repurchase agreement, shifting to a fixed quantity, interest rate bidding, and multiple price level bidding system, which is expected to enhance liquidity management in the banking system [4][5]. Summary by Sections Event - On September 19, 2025, the People's Bank of China announced that the 14-day reverse repurchase operation would now be conducted with fixed quantity and interest rate bidding, along with multiple price level bidding [4]. Commentary - The primary policy interest rate in China is the 7-day Open Market Operation (OMO) rate, which is crucial for signaling monetary policy. The fixed rate bidding is deemed most appropriate. Compared to variable rate bidding, the new system allows for better allocation of scarce central bank funds to those truly in need. Traders seeking 14-day OMO funds can bid at higher rates, increasing their chances of full allocation. This change is expected to stabilize the short end of the yield curve and maintain ample liquidity in the banking system [5][6]. - It is anticipated that the 14-day OMO operations will occur more frequently than in previous years, not limited to just before major holidays. The first operation under the new bidding method is likely to take place on September 22 [5]. Interest Rate Corridor - The 7-day and 14-day OMOs are seen as new partners in maintaining liquidity, while the interest rate corridor serves as an old tool to stabilize short-term rate fluctuations. The upper limit of the corridor is the Standing Lending Facility (SLF) rate, which varies with the 7-day OMO rate, maintaining a 100 basis point spread. The lower limit is the Interest on Excess Reserves (IOER), currently at 0.35% [7]. - Narrowing the interest rate corridor could reduce fluctuations in the DR (Deposit Rate) and enhance the effectiveness of interest rate control. Two methods could achieve this: lowering the SLF rate in line with the 7-day OMO rate or reducing the spread above the OMO rate [7][8]. Market Activity - Concerns about whether lowering the SLF rate would lead to increased trading with the central bank and reduce market activity are deemed unfounded. The SLF operation volumes from May to August 2025 were significantly lower than the interbank repo transaction volumes. The current spread between the 7-day SLF and DR007 rates is at a moderate level, suggesting that a reduction in the SLF rate would not lead to excessive reliance on it by market participants [8].

Summary of Key Points from the Conference Call Industry Overview - The conference call primarily discusses the changes in China's monetary policy framework and its implications for economic growth and liquidity management. Core Insights and Arguments 1. **Monetary Policy Changes**: Since 2025, the main constraints on monetary policy have shifted from stabilizing the exchange rate to addressing net interest margin pressures and risk prevention. The exchange rate is no longer a significant constraint as of Q2 2025, with the USDCNH and USDCNY reaching a unified rate of 7.10 [2][3][4]. 2. **Need for Rate Cuts**: The necessity for interest rate cuts and reserve requirement ratio (RRR) reductions is increasing, particularly if Q3 GDP growth falls below 5.0%. Economic data from July and August has consistently underperformed expectations, indicating a potential need for policy adjustments [4][24][26]. 3. **Government Bond Trading Resumption**: The conditions for resuming government bond trading are becoming more favorable. After a pause in Q1 2025, market expectations for a resumption have grown, especially if the Ministry of Finance issues bonds early in Q4 2025, which could alleviate supply pressure [5][26]. 4. **Framework Evolution**: The monetary policy framework has evolved to focus more on price-based controls rather than quantity-based tools. Key indicators now include M2, social financing, and loan growth, reflecting a shift in the central bank's strategy to stabilize economic growth [6][8][27]. 5. **Liquidity Management**: The liquidity management framework has changed significantly, relying on various tools such as overnight and 7-day reverse repos, with government bond trading serving as a supplementary tool when other methods are insufficient [13][14][19]. 6. **Dual Pillar System**: The dual pillar system distinguishes between monetary policy aimed at macroeconomic stability and macro-prudential policy focused on preventing systemic financial risks. This includes measures like the "three red lines" in the real estate sector [10][11][12]. 7. **Interest Rate Corridor Adjustments**: The interest rate corridor mechanism has undergone changes, with the 7-day reverse repo rate becoming the primary policy rate. The new corridor reflects a narrower range of fluctuations compared to previous versions [20][23]. 8. **Future Expectations**: There is a high probability of further rate cuts and RRR reductions in Q4 2025 to support economic growth targets. The resumption of government bond trading is also anticipated as a liquidity management tool rather than a price control measure [26][27]. Other Important but Potentially Overlooked Content - The central bank's focus on price-based tools indicates a strategic shift in response to changing economic conditions, emphasizing the need for market adaptation to these evolving frameworks [27]. - The potential for hidden interest rate hikes due to increased government bond supply highlights the delicate balance the central bank must maintain in managing liquidity and interest rates [5][19].

Report Summary 1) Report Industry Investment Rating No industry investment rating is provided in the report. 2) Core Viewpoints of the Report - The adjustment of the 14D OMO reverse - repurchase tender method can better stabilize the short - end fluctuations of the yield curve and maintain the abundance of bank system liquidity [2]. - It is expected that 14D OMO operations will be more frequent than before, and the first 14D OMO operation after the change of the tender method may be carried out on September 22, 2025 [2]. - Attention should be paid to real - time DR and CD interest rates rather than privately inquired winning bid rates of 14D OMO, as the latter contains limited monetary policy information and is often lagging [3]. - Moderately narrowing the interest rate corridor can reduce DR fluctuations and improve the efficiency of interest rate regulation, and currently, there are basic conditions to narrow the interest rate corridor by moderately reducing the SLF interest rate [3][4]. 3) Summary by Relevant Catalogs Event - On September 19, 2025, the People's Bank of China announced that, starting from that day, the 14 - day reverse - repurchase operation in the open market would be adjusted to fixed - quantity, interest - rate tender, and multi - price winning bids [1]. Comment - The 7D OMO interest rate is the main policy interest rate in China. The new combination of 7D OMO (fixed - interest, quantity tender) and 14D OMO (fixed - quantity, interest - rate tender, multi - price winning bids) can better stabilize the short - end fluctuations of the yield curve and maintain the abundance of bank system liquidity [2]. - It is expected that 14D OMO operations will be more frequent than in previous years, not limited to before the Spring Festival and National Day. The first 14D OMO operation after the change of the tender method may be carried out on September 22, 2025. In the future, some investors may be interested in privately inquiring about the winning bid rate of 14D OMO, but these rates contain limited monetary policy information, and attention should be paid to real - time DR and CD interest rates [2][3]. - 7D and 14D OMO are the "new partners" for maintaining liquidity abundance, and the interest rate corridor is the "old assistant" for suppressing short - end fluctuations. Moderately narrowing the interest rate corridor can reduce DR fluctuations and improve the efficiency of interest rate regulation. There are two ways to narrow the interest rate corridor: the natural compression when the 7D OMO interest rate and SLF decline together, and the reduction of the spread of the SLF interest rate above the OMO interest rate [3]. - Currently, there are basic conditions to narrow the interest rate corridor by moderately reducing the SLF interest rate. From May to August 2025, the SLF operation volume was much smaller than the inter - bank pledged repurchase trading volume. The minimum value and 10% quantile of the spread between the 7D SLF and DR007 from early 2024 to September 19, 2025, were at a moderate and relatively large level [4].

中国央行最早提出将DR007作为市场基准利率是2016年11月。当时发布的《2016年第三季度货币政策执行报告》表示："DR007可降低交易对手信用风险和 抵押品质量对利率定价的扰动，能够更好地反映银行体系流动性松紧状况，对于培育市场基准利率有积极作用。" 中国人民银行近期公布的《2025年第二季度中国货币政策执行报告》在展示货币市场利率走势时用了DR001（银行间存款类机构以利率债为质押的隔夜回购 加权平均利率）这一指标。图示还显示，DR001围绕7天逆回购利率波动。 7天逆回购利率是央行政策利率，也是最重要的利率，决定着货币市场、债券市场、存贷款市场的利率水平，其中货币市场利率又以DR（存款类金融机构间 的债券回购利率）最为重要。DR可以理解为银行以国债质押融资的利率水平，包括隔夜（DR001）、7天（DR007）、 14天（DR014）等品种，是反映银行 间短期资金松紧程度最真实、最核心的"温度计"。 此前DR007最为重要，央行通过每日开展公开市场操作，使DR007围绕7天逆回购政策利率波动。在过往货币政策执行报告中，央行展示货币市场利率走势 时选用的指标也是DR007。但从《2025年第一季度季度中 ...

Core Viewpoint - The article discusses the progress and optimization of interest rate marketization in China, emphasizing its importance for economic development and the need for further improvements in the interest rate transmission mechanism [2][3][4]. Group 1: Progress of Interest Rate Marketization - During the "14th Five-Year Plan" period, significant strides have been made in interest rate marketization, establishing a framework where market rates and central bank guidance effectively transmit monetary policy signals to the real economy [3][4]. - Key breakthroughs include the comprehensive smoothing of the interest rate transmission mechanism, optimization of the policy interest rate system, and the formal establishment of a market-driven interest rate system [4][5]. Group 2: Policy Rate and Market Rates - In 2024, the central bank will establish the 7-day reverse repurchase rate as the main policy interest rate, replacing the MLF rate, which enhances the short-term interest rate's guiding role [5]. - The People's Bank of China (PBOC) has guided market interest rates to operate smoothly around the policy rate, with the DR007 rate maintaining synchronization with the 7-day reverse repurchase rate [5][6]. Group 3: Loan and Deposit Market Rates - Financial institutions are encouraged to reference the 7-day reverse repurchase rate for LPR pricing, improving the mortgage pricing mechanism and eliminating the nationwide personal housing loan interest rate floor [5][6]. - The PBOC has established a market-based adjustment mechanism for deposit rates, allowing banks to adjust rates based on the 10-year government bond yield and 1-year LPR [7]. Group 4: Challenges and Recommendations - Despite progress, there is still room for optimization in the interest rate transmission mechanism, particularly in improving the quality of LPR quotes and addressing the mismatch between quoted rates and actual rates offered to customers [10][11]. - The article suggests a shift from quantity-based monetary policy targets to price-based frameworks, enhancing the coordination between monetary policy and fiscal measures to stimulate demand [12][13]. Group 5: Future Outlook - The "15th Five-Year Plan" period will face complex domestic and international challenges, necessitating more flexible and forward-looking macroeconomic policies [15][16]. - Recommendations include refining the policy interest rate system, enhancing the representation of short-term rates in the market, and exploring differentiated pricing templates for specific sectors [16][18].

Global Monetary Policy Tracking - The major central banks of the US, Eurozone, and Japan have maintained their interest rates unchanged as of July 2025, with the Federal Reserve holding rates at 4.25%-4.5% [2][12] - The expectation for rate cuts in the US has decreased, with the anticipated number of cuts dropping from nearly 3 in early July to less than 2 by the end of July, and the probability of a September cut falling from 90% to about 40% [3][19] - In the Eurozone, the expectation for a rate cut has also cooled, with the probability of a September cut decreasing from 42% to approximately 10% [3][19] - Japan's central bank has maintained its policy rate unchanged for the fourth consecutive time, with inflation expectations being revised upwards [3][15] Global Liquidity Tracking - The Federal Reserve's balance sheet has contracted, with reserves shrinking by $57.7 billion since the beginning of the tapering process, and a monthly reduction of $47.6 billion in July 2025 [4][27] - The liquidity in the non-bank sector is tightening, as indicated by the frequent positive spread between SOFR and EFFR rates, reflecting a significant liquidity squeeze in non-bank institutions [4][30] - The liquidity premium in the US dollar market remains elevated, with the Libor-OIS spread maintaining a high level, indicating that liquidity is still ample despite some tightening [6][40] Credit Risk Premium - Since July 2025, the OAS of US high-yield credit bonds and the CDS prices for high-yield and investment-grade bonds have seen a slight increase, indicating a rise in credit risk premium [9][45] - In contrast, CDS prices for credit bonds in Europe, Japan, and Asia remain low, suggesting a relatively stable credit environment outside the US [9][45]

Core Viewpoint - The article discusses the advantages and disadvantages of the reserve requirement system, noting that its quantitative control and liquidity assurance functions have gradually been replaced by other monetary policy tools. It emphasizes the importance of excess reserve interest rates in exercising price-based control functions through the interest rate corridor mechanism. The article explores the future development direction of China's reserve requirement system in the context of financial deepening and monetary policy transformation [1]. Group 1: Research Background - The reserve requirement system is a core tool of modern monetary policy, ensuring liquidity and financial stability by requiring commercial banks to deposit a certain percentage of their deposits as reserves with the central bank. It has both quantitative and price-based control attributes, allowing for adjustments in the reserve ratio to regulate the money supply and setting reserve interest rates to participate in the interest rate corridor mechanism [2]. Group 2: Advantages and Disadvantages of the Reserve Requirement System Advantages - The reserve requirement system contributes to financial stability by ensuring the payment and clearing capabilities of commercial banks, thus avoiding liquidity risks [3]. - It regulates market liquidity by adjusting the reserve ratio during periods of excess or insufficient liquidity, maintaining market stability [3]. - It helps suppress inflation by reducing the money supply during economic overheating [4]. - It can mitigate capital inflows and unilateral exchange rate fluctuations through differentiated reserve requirements for foreign institutions [4]. Disadvantages - Adjustments to the reserve requirement can lead to significant liquidity changes, causing excessive reactions from financial institutions and market volatility [5]. - The low interest rates on required reserves can act as a tax on banks, potentially leading to higher costs for customers and affecting competition with non-bank financial institutions [5]. - Financial innovations have weakened the money multiplier effect, with the elasticity coefficient of M2/GDP in China declining by 0.3 from 2015 to 2020 [5]. - The functions of the reserve requirement system have diminished, as financial stability can now be achieved through stricter capital adequacy requirements and liquidity indicators established by Basel III [5]. Group 3: Historical Evolution and Current Status of Reserve Requirement Systems in Major Countries United States - Before the 1980s, the Federal Reserve used the reserve requirement system to control money supply, but reliance shifted to open market operations and discount windows due to financial innovations. Following the 2008 financial crisis, the reserve requirement system was effectively phased out, with the Federal Reserve focusing on maintaining sufficient reserves to directly influence short-term market rates [6]. United Kingdom - The Bank of England initially implemented a mandatory reserve requirement but later transitioned to a zero reserve requirement to enhance competitiveness. In 2006, it adopted a voluntary reserve system, paying interest on agreed reserve amounts [7]. Eurozone and Japan - Unlike the U.S. and U.K., the European Central Bank and the Bank of Japan have maintained low reserve requirements while focusing on interest rate tools to achieve monetary policy goals [8]. Emerging Economies - Emerging economies continue to utilize reserve requirements as a macroprudential policy tool to stabilize financial markets and manage capital flows, with countries like Brazil and India successfully implementing dynamic reserve requirements to address liquidity issues [9]. Group 4: Current Status of China's Reserve Requirement System - China continues to implement the reserve requirement system, which plays a role in regulating money supply and serves as a macroprudential policy tool. However, the reserve interest rate has not yet become a significant part of the price control system [11]. Group 5: Future Development Directions of China's Reserve Requirement System Overall Conditions - China is positioned to consider the cancellation of the reserve requirement system as a quantitative control policy, while still needing to maintain a low ratio of required reserves for daily payment and clearing needs [15]. Price-Based Control Policies - The central bank is advancing a price-based control policy centered on interest rate adjustments, having already relaxed restrictions on interest rate fluctuations [16]. Recommendations - It is suggested to retain a certain level of required reserves to ensure daily payment and clearing needs, while optimizing the interest rate corridor to enhance the effectiveness of interest rate guidance [19].

Group 1: Interest Rate Trends - The 10-year interest rate continues to fluctuate within a "rate corridor" defined by the 250-day moving averages of DR001 and DR007, with the lower bound at 1.58% and the upper bound at 1.74%[7] - In July, the 10-year interest rate rose by 6.30bps, while the 30-year rate increased by 9.74bps, indicating a significant upward adjustment in rates during this period[6] - The 10-year interest rate has tested the upper boundary of the corridor twice in March and July, but has not effectively broken above the DR007 annual line[12] Group 2: Market Sentiment and Strategy Shifts - Market sentiment is shifting from "buying on dips" to "taking profits on lows" as the anticipation of "anti-involution" policies has changed investor behavior[13] - The average spread between DR001 and the 10-year interest rate was 1.73bps from May to June, indicating a strong correlation between these rates during this period[12] - The bond market is experiencing pressure from potential "supply-side reform 2.0," which could lead to upward pressure on interest rates due to rising commodity prices[16] Group 3: Economic and Policy Considerations - The expectation of "re-inflation" in the economy relies on closing the output gap, suggesting that mere price increases may not sustain upward pressure on interest rates[16] - The report highlights risks such as the uncertainty surrounding U.S. tariff policies and the unclear path of the Federal Reserve's interest rate cuts, which could impact U.S. Treasury yields and dollar liquidity[18] - The bond market is expected to see a moderate downward correction in interest rates as liquidity conditions improve, with DR001 returning to the 1.40%-1.30% range[12]

Historical Context - From 1949 to 1977, China's monetary policy served as an administrative tool under a unified banking system, lacking market foundations and credit creation mechanisms[3][4]. - Post-1978, the separation of central and commercial banking functions led to an independent monetary policy framework, establishing a dual-layer currency creation mechanism[4][5]. Transition Phases - From 1998 to 2012, a quantity-based control system emerged, with M2 and total credit volume as core targets, driven by non-market interest rates and external pressures[5][6]. - After 2012, the effectiveness of quantity tools diminished, prompting a shift towards price-based monetary policy, with interest rates becoming central to regulation[6][7]. Structural Changes - By 2020, the proportion of new RMB loans in total social financing dropped from 91.9% in 2002 to 57.5%, indicating a shift towards off-balance-sheet financing[7][30]. - The balance of current accounts as a percentage of GDP decreased from around 10% in 2007 to below 3% post-2011, reflecting changes in foreign exchange reserves and monetary policy dynamics[7][34]. Policy Mechanisms - The establishment of a rate corridor in 2015 clarified policy signals, with the SLF as the upper limit and excess reserve rates as the lower limit, enhancing market expectations[9][10]. - As of 2023, the monetary policy framework has been optimized to strengthen the price-oriented function of policy rates, narrowing the rate corridor from 245 basis points to 70 basis points[10][11]. Future Outlook - The price-based framework is expected to deepen, with structural monetary policy tools gaining priority to address financing gaps in emerging sectors like technology and green industries[12][11]. - The focus will shift from total quantity control to structural optimization, emphasizing targeted resource allocation in key areas such as housing and infrastructure[12][11].

Core Viewpoint - The Reserve Bank of India (RBI) plans to withdraw 1 trillion rupees (approximately 11.6 billion USD) through a variable rate reverse repo agreement on June 27, aiming to prevent overnight borrowing costs from declining further and to manage liquidity in the financial system [1][4]. Group 1: RBI's Actions and Intentions - The RBI's decision to withdraw liquidity is intended to address the mismatch caused by key financing rates and short-term rates being persistently below the central bank's main policy rate [1]. - Analysts suggest that the RBI is acting cautiously to strengthen policy transmission and mitigate inflation risks while balancing economic growth and inflation control [1][5]. - The RBI's recent actions have led to a sell-off in short-term bonds, with the yield on the 2029 bond rising by 4 basis points to 6.03% and interbank rates increasing by 5 basis points to 5.32% [4]. Group 2: Market Reactions and Economic Indicators - Over the past two months, overnight rates have been consistently 20-25 basis points lower than the repo rate, with the shortest-term government bond yields also approximately 15 basis points lower [4]. - The RBI's liquidity injection of over 9.5 trillion rupees since January has contributed to the current low rates, prompting the need for liquidity withdrawal [4]. - The RBI's interest rate corridor, which includes a current repo rate of 5.5%, an upper limit of 5.75%, and a lower limit of 5.25%, is designed to manage short-term borrowing costs and guide liquidity in the banking system [4].