Market News

(Bloomberg) -- China has taken the next step in its quest to put its financial markets on a par with the US and make the yuan a global reserve currency.

People’s Bank of China Governor Pan Gongsheng unveiled measures on Wednesday aimed at upgrading the central bank’s toolkit and making yuan-denominated assets more attractive to overseas investors. He hinted at a shift toward an overnight policy-rate framework, and launched a facility for foreign central banks and financial organizations to obtain yuan liquidity against government bond holdings.

Both measures bring China’s monetary toolkit closer to that of major central banks such as the Federal Reserve, which uses overnight rates as its main policy benchmark and operates a facility that allows foreign institutions to borrow dollars against their Treasury holdings. Those arrangements are part of what makes Treasuries the world’s most liquid and widely held assets.

The latest moves, announced at the annual Lujiazui forum in Shanghai, make Chinese government bonds resemble those in established sovereign bond markets and “therefore a more attractive proposition as reserve assets,” said Wee Khoon Chong, Asia Pacific market strategist at BNY.

Pan’s comments add to signs that the PBOC may eventually move away from the seven-day reverse repo rate as its main policy benchmark. Expectations for such a shift have grown as the central bank has placed greater emphasis on the overnight interbank rate, which accounts for the bulk of cash transactions in China’s financial markets.

The PBOC also narrowed the range within which market borrowing costs can fluctuate to 50 basis points from 70, giving it finer control over short-term funding.

A shorter-term policy anchor may give the PBOC greater precision in steering market conditions. Financial institutions borrow from one another daily to manage liquidity and settle transactions, making overnight rates much more heavily traded than other tenors.

The Fed operates a similar framework, setting a target range for the federal funds rate at which banks charge to borrow from each other overnight. That range is currently at 3.50% to 3.75%, narrower than the new corridor announced by the PBOC.

“PBOC will likely gradually move towards a new monetary policy corridor framework, with overnight repo rate being the likely new de facto policy rate,” said Becky Liu, head of China macro strategy at Standard Chartered Plc. “China’s interbank rates will likely be even less volatile ahead.”