The People's Bank of China (PBOC) announced on the morning of July 22 that, effective immediately, it would optimize its open market operations mechanism by adjusting the seven-day reverse repo operations to a fixed rate and quantity bidding system. Additionally, to further enhance counter-cyclical adjustments and bolster financial support for the real economy, the seven-day reverse repo rate has been lowered from 1.80% to 1.70%.

This marks the first adjustment to the seven-day reverse repo rate since August 2023. According to data previously released by the National Bureau of Statistics, China's GDP grew by 4.7% year-on-year in the second quarter, showing a deceleration from the first quarter, with particularly sluggish recovery in consumer spending. The PBOC's decisive rate cut underscores its commitment to nurturing economic recovery through monetary policy.

Experts suggest that the policy rate reduction is expected to gradually transmit through financial markets to the real economy, helping to lower overall financing costs and reinforce the positive trend of economic recovery, while breaking the negative cycle of declining long-term bond yields and weakening expectations.

Industry experts emphasize that the reduction in the seven-day reverse repo rate does not imply an opening for further declines in long-term bond yields. The PBOC's rate cut aims to intensify counter-cyclical adjustments and smooth out short-term economic fluctuations. Long-term bond yields, however, reflect long-term economic trends and should be assessed with a cross-cycle perspective. Analysts note that the recent decline in long-term bond yields has already anticipated this rate cut, and even shows signs of over-adjustment. It does not necessarily mean that long-term yields will continue to follow the downward trend of the seven-day reverse repo rate. In fact, the current excessively low long-term bond yields have drawn international attention to potential risks. Persistently low long-term yields can lead to self-fulfilling weak expectations, despite the fundamentally positive long-term outlook for China's economy. The PBOC's rate cut is expected to support economic recovery, boost medium to long-term economic expectations, and help lift long-term yields.

Industry insiders point out that the PBOC's explicit signaling of open market operation rates will reinforce the policy attributes of the seven-day reverse repo rate.