(Yicai) Nov. 2 -- Chinese lenders are expected to incur lower liability costs and promote the reconstruction of their loan pricing systems, after the country’s central bank shifted its policy anchor to the overnight reverse repurchase rate.

The People’s Bank of China announced on Oct. 30 a shift in its short-term policy framework from the seven-day reverse repurchase rate to the overnight reverse repurchase rate. Today, it conducted CNY541 billion (USD80.6 billion) of overnight reverse repo at a fixed interest rate of 1.25 percent through quantity-based bidding.

Loan prime rate quotations are formed by adding a spread to the core policy rate, so changes in the core policy rate are directly transmitted to the LPR and, in turn, to actual lending rates. In March 2025, the LPR pricing benchmark was re-anchored from the medium-term lending facility to the seven-day reverse repo rate, but this did not trigger any adjustment in the LPR quotation because it came after a policy rate cut.

Overnight reverse repo operations may already be the main open-market operation instrument in practice, said Tan Yiming, analyst at TF Securities, adding that rates on interbank demand deposits and listed deposits may also be anchored to the overnight rate going forward.

Tan believes that in the short term, any adjustment to the LPR and listed deposit rates may still need to be observed, and the re-anchoring itself may not be a necessary condition for an LPR adjustment. If the overnight rate, as the policy rate, is lowered later, the LPR and listed deposit rates are also expected to follow, he noted.

Negotiable CDs have already partly reflected the benefits of the re-anchoring, said Zhou Guannan, chief fixed-income analyst at Huachuang Securities. The pricing ceiling for interbank demand deposits may also switch to the overnight reverse repo rate, and Shanghai Interbank Offered Rate quotations may decline in line with money market rates, driving down interbank time deposit rates and thus lowering banks’ liability costs, he explained.

If DR001 is used as a benchmark to price three-month loans, then the risk-free term premium between the overnight and three-month maturities must be determined first, said Wen Bin, chief economist of China Minsheng Bank. On that basis, the bank then sets a risk premium according to the borrower’s credit profile.

The policy re-anchoring may lower money market rates, so financing costs for investing in negotiable CDs and bonds in the money market may decline, Wen noted, adding that relative returns from lending funds in the money market may rise. This, in turn, could create room for further declines in CD and bond yields.

The bond market pricing was already relatively sufficient, and the expected re-anchoring effect was largely reflected in the first half of October. DR001 has remained around 1.26 percent since the beginning of last month, which helped push bond yields down more quickly, along with rising expectations for the re-anchoring.

Therefore, the room for further compression may be limited at the moment, Tan believes.

Editor: Futura Costaglione