(Oct 20): China’s central bank may be embarking on a multi-month transition towards an overnight policy interest rate, a shift that will require more frequent liquidity operations using the new benchmark candidate to test market reception, analysts say.

Analysts at Société Générale SA and Tianfeng Securities see the switch as a gradual process rather than a one-off change, following People’s Bank of China governor Pan Gongsheng’s signal that the central bank will study replacing its seven-day benchmark with an overnight tenor.

The transition underscores the central bank’s ongoing efforts to refine its monetary policy framework and to place greater emphasis on interest-rate guidance. How the switch is implemented could directly impact funding costs, which have already helped pull benchmark bond yields towards their lowest close since early 2025.

“The PBOC should be conducting more frequent one-day open market operations and observe whether the transmission is working well to influence short-term rates and reduce volatility,” said Michelle Lam, greater China economist at Société Générale.

“It could take place over the coming months as soon as the fourth quarter. The window is the upcoming quarterly PBOC meeting,” she said.

Demonstrating that step-by-step approach, the PBOC announced it will conduct overnight reverse repos from Oct 21 to Nov 2, moving beyond its prior practice of using such operations strictly during month-end or tax-payment seasons.

Gao Xiang, head of the financial derivatives team at Nanhua Futures Research Institute, said the PBOC’s announcement on overnight reverse repo operations in October and November is intended to lay the groundwork for the transition.

“We believe further groundwork may be needed before the transition to an overnight policy rate can be completed, including increasing the frequency of overnight operations and improving pricing transparency,” he said.

While near-term policy meetings may provide further clarity on the framework, a formal switch could take longer to materialise as the central bank tests transmission.

“We expect the overnight open market operation rate may be formally established as the benchmark anchor in the first half of 2027,” Tianfeng Securities analysts led by Liu Jie wrote in a note.

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