What exactly changed in the policy rate benchmark?

  • From 2 November 2026, the central bank shifted its policy rate from the 7-day reverse repo rate to the overnight reverse repo rate. The overnight rate is currently 1.25%, 15 basis points below the 7-day rate of 1.40%.
  • Overnight reverse repos will be conducted every business day through fixed-rate, quantity-based tenders; 7-day reverse repos will instead use fixed-quantity, interest-rate tenders with multiple-price allotment, mainly at key liquidity periods such as tax payment periods and month-end.
  • Tools such as temporary repos, previously priced at a spread to the 7-day reverse repo rate, are also shifting to the overnight rate, with existing spreads unchanged. The corresponding interest rate corridor moves down from 1.15%–1.65% to 1.0%–1.5%.

Why are overnight operations better suited to managing liquidity?

  • Goldman Sachs notes that using 7-day funds to ease a one-day shortage could previously leave excess liquidity in the following days, making cash management more difficult. Daily overnight injections allow the central bank to supply and withdraw funds more promptly.
  • Goldman Sachs believes that although the switch is not a 15-basis-point rate cut in the conventional sense, all else being equal it will increase interbank liquidity and lower yields across the bond yield curve. The next direction for reform is to accelerate the repricing of loans with reference to the interbank overnight rate DR001.

Why was the reform introduced earlier than expected?

  • The reform was implemented earlier than many market participants, including Goldman Sachs, had expected. Third-quarter GDP was stronger than expected, reducing pressure on policymakers to ensure the full-year growth target is met.
  • Goldman Sachs believes recent credit risks involving Zhuhai Huafa and related fund redemptions, together with continued weakness in the stock market, may have prompted the central bank to act early to support market sentiment and maintain stable liquidity.

What is the outlook for further rate cuts and market rates?

  • Based on Goldman Sachs’ discussions with clients, investors generally expect the 7-day reverse repo rate to fall to 1.30%–1.35% after the change in benchmark, equivalent to an effective rate cut of 5–10 basis points. On that basis, Goldman Sachs believes a further policy rate cut is unlikely in the near term.
  • If domestic credit risks evolve, a cut in the reserve requirement ratio would become more likely; the central bank may also use the newly introduced swap facility for non-bank financial institutions in the bond market to contain risk spillovers.
  • Given the current relatively weak economic fundamentals and the transition in the monetary policy framework, Goldman Sachs expects Chinese government bond yields and swap rates to decline gradually.