Recently, the central bank's monetary policy has indeed seen a series of remarkable "new moves":

The nation's first loan was implemented based on DR (7-day repo rate pledged by interbank deposit financial institutions using interest rate bonds as collateral). The first loan priced based on government bond yields was also successfully implemented.

Recently, the usual 7-day reverse repo operations have been suspended for three consecutive days. For the first time, it was announced in advance that an "overnight reverse repo" operation would be conducted in mid-month. Furthermore, in the Q2 monetary policy implementation report released on August 12, the central bank frequently mentioned "monetary policy framework reform."

How should we interpret the recent changes in central bank monetary policy? Kingtech explains.

| What is the significance of normalizing overnight rate operations?

The central bank has recently frequently carried out "overnight reverse repos" operations, signaling an important shift in monetary policy. The core significance of this initiative can be simply summarized in three points:

1. Paving the way for the "policy rate anchor change."

The central bank is gradually shifting the target rate for short-term regulation from the 7-day (DR007) to the shorter overnight rate (DR001). Currently, overnight repo transactions account for over 90% of the currency market. The central bank has extended its operations from month-end operations in June and July to mid-month operations in August due to tax payments and other timings, gradually shifting the "overnight reverse repo" from a temporary emergency tool into a routine operation, laying the foundation for the future policy rate to be "anchored" at the overnight rate.

2. Making short-term liquidity more stable (refined management)

The central bank gives advance warnings and conducts overnight reverse repo operations, which can precisely hedge short-term liquidity tightness caused by large maturities or concentrated tax payments. This not only alleviates market concerns about a "cash shortage" but also reduces the sharp fluctuations in short-term funding rates, making the central bank's short-term interest rate management more refined and efficient.

3. Brings the effect of "hidden interest rate cuts."

Currently, the overnight reverse repo rate is lower than the 7-day reverse repo rate. As central banks increasingly use this lower-cost overnight tool to inject liquidity, overall financing costs in the interbank market will naturally decline. Although this operation may not directly result in a direct cut in the 7-day reverse repo rate, its actual effect is equivalent to a downward adjustment of the policy rate center, which to some extent serves as a "rate cut."

| Why has the central bank suspended reverse repo for 3 consecutive days and 7 days?

The central bank suspended the 7-day reverse repo operation for three consecutive days. This does not mean monetary policy is shifting to tightening, but rather reflects an upgrade in central bank regulation. Specifically, it can be understood from the following three dimensions:

1. Shift in Regulatory Logic: From "Volume Viewing" to "Price Viewing"

The central bank's seven-day suspension of reverse repo is the result of its monetary policy framework shifting toward "price-driven" regulation. This means central banks are weakening the signaling significance of "quantitative instruments" (i.e., the absolute amount of funds injected), and future policy signals will mainly be transmitted through key market rates such as policy rates and DR001.

2. Liquidity remains stable: Precise hedging, no need for flooding

Although the 7-day reverse repo has been suspended, market liquidity remains stable. The rates for DR001 and DR007 continued to fluctuate around 1.37% and 1.39%, with no obvious abnormalities. Facing the upcoming tax payment period, the central bank has already announced and arranged "overnight reverse repos" for precise hedging. Therefore, the amount of funds at individual nodes is no longer so important; investors should pay more attention to the overall liquidity environment and changes in funding rates.

3. Historical Data Confirms: The central bank has always safeguarded liquidity

Looking back, central banks often suspend reverse repo injecting liquidity through other channels. For example, although reverse repo was suspended in June this year, a cumulative net injection of 905.4 billion yuan through other open market channels was made; In July, net injections continued to reach 687.8 billion yuan. This indicates that the central bank's overall intent to safeguard market liquidity has not changed.

4. Central Bank's Agreed Interest Rate Range: Stable operation around policy rates

From the perspective of funding prices, the market interest rate range agreed upon by the central bank may be within 10 basis points above or below the policy rate (currently 1.4%), or even narrower. Previously, in April and May, DR001 was once 18 basis points below the policy rate, prompting the central bank to reduce its injection and liquidity withdrawal; When DR001 rebounded above 1.3% at the end of May, the central bank returned to net liquidity injection. This fully demonstrates that central bank operations have always been aimed at guiding market interest rates to operate smoothly around the policy center.

|Why did loan interest rates change anchors? Can it bring about substantial rate cuts?

The central bank has proposed that the pricing benchmark for loan interest rates shift from "single" to "diversified," and the market has already begun implementing new loans priced using "DR (Deposit-Taking Financial Institution Bond Repurchase Rate) or government bond yield + dot."

Many people are wondering: what exactly is this for? Can it bring about substantial rate cuts?

1. Why "change anchors"? To regulate more precisely
, our loan pricing mainly focused on the LPR as a benchmark, but different types of companies and loan types struggle to match accurately using the same benchmark. The central bank's push for "anchor replacement" is aimed at improving the interest rate regulation system. By using real market transaction rates like DR001 as new benchmarks, central banks can more quickly and effectively convey policy intentions to the market.

2. Can it bring about substantial rate cuts? Just because the "anchor" has changed doesn't
mean the company's financing costs will decrease accordingly. The core factors determining loan interest rates remain the bank's own liability costs and net interest margin. Under the "benchmark rate + additional points" pricing model, simply replacing the previous "benchmark" from A to B, as long as the bank's margin increase remains unchanged, the final loan interest rate will not decrease.

3. Historical experience confirms: Changing anchors does not mean cutting rates
; we can refer to the experience of 2019. At that time, the benchmark for loan interest rates shifted from the traditional "loan benchmark rate" to "LPR quotation," but this "anchor change" did not bring about a substantial rate cut, and the weighted average cost of loans in Q3 2019 did not show a significant decline. Therefore, investors should maintain the same rational expectations for this anchor change.

| Will interest rates be cut in the short term?

In its Q2 monetary policy report, the central bank sent an important signal, adjusting the wording to "comprehensively use and timely adjust monetary policy tools." Based on current economic fundamentals, the core conclusions regarding whether interest rate cuts will occur in the short term are as follows:

1. Short-term rate cut probability is low, with the focus on "landing existing stock"

In the short term, the central bank is unlikely to adopt comprehensive interest rate cuts or other aggregate-based tools. The current policy focus is to "make good and full use of the policies already introduced." Monetary policy will mainly consist of structural and quantitative instruments, with enhanced coordination with fiscal policy to provide liquidity support.

2. Why is there no rush to cut interest rates in the short term? The economic fundamentals are controllable

Overall target secure: Although GDP growth in the second quarter was 4.3%, overall growth in the first half reached 4.7%, still within the policy target range. In the second half of the year, only a growth rate of 4.3%-4.4% is needed to meet the target, with little pressure.

Strong momentum in new industries: The economic structure is becoming new and optimistic, with emerging fields such as the AI industry chain experiencing extremely high prosperity. In July, equipment such as integrated circuits drove exports by 10 percentage points, and related industry PPIs continued to rise.

Targeted measures for structural issues: Current pressure is mainly concentrated in real estate and commodity consumption. To address these structural issues, the central bank prefers to use "structural tools" for precise drip irrigation rather than flooding the market.

The current policy tone is "to research and reserve incremental measures." If by the third quarter, the economy has not stabilized or rebounded due to the implementation of existing policies and the low base effect, then incremental policies such as interest rate cuts are expected to be officially announced around the fourth quarter.