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Event: On October 19, 2026, Governor Pan delivered a keynote speech at the Financial Street Forum Annual Meeting, announcing several subsequent policy arrangements. Our understanding of several of these policies is as follows.
Report Summary
The PBOC will switch the maturity of its main open market operation instruments to overnight at an appropriate time. 1. Essentially, this can be understood as reducing commercial banks' financing costs by shortening the duration of their financing from the central bank. Whether this can be understood as a "quasi-rate cut" depends on whether it can be transmitted to interest rates of other maturities and varieties, thereby bringing about a downward shift in the broad interest rate center. 2. The shortening of the duration of the main operation instruments means that commercial banks will subsequently regulate interbank liquidity with greater precision. 3. Going forward, two points deserve close attention: first, the specific implementation timing corresponding to the "appropriate time" stated by Governor Pan; second, the overnight reverse repo rate has not yet been officially announced by the central bank, so attention should be paid to how it will be set.
Exit the deposit and loan benchmark interest rates and promote reform of the loan interest rate pricing benchmark. 1. On the financing side, as equity and bond financing account for an increasingly higher proportion of total social financing, under financing diversification, the diversification of loan interest rate benchmarks is also a commensurate reform; this point was already discussed in the earlier PBOC column "International Experience in Loan Interest Rate Pricing Benchmarks." 2. On the deposit side, at present, by guiding members of the interest rate self-discipline mechanism to reasonably adjust deposit interest rate levels with reference to changes in market interest rates, the deposit benchmark interest rate has basically ceased to play a role, and its exit will have little impact.
Establish a liquidity support tool to address large-scale redemptions by non-bank institutions. 1. This tool focuses on liquidity risk in the bond market, not the equity market. 2. The policy wording has shifted from "continue to study" to "establish," meaning the tool is moving further toward implementation. 3. In terms of usage scenarios, this means the tool is more akin to a risk-prevention tool under extreme scenarios such as sharp interest rate fluctuations; smaller interest rate fluctuations will not trigger the use of this tool.
Understanding of current monetary policy — the "impossible trinity" of monetary policy. Against the backdrop of weak real-economy credit financing, the central bank's monetary policy objectively faces an impossible trinity, namely that the central bank cannot simultaneously maintain a stable policy rate, increase liquidity injection, and maintain an upward-sloping yield curve. 1. Maintaining an upward-sloping yield curve helps prevent risks in financial institutions and build reasonable macro inflation expectations. 2. A policy rate cut naturally helps lower financing costs, but attention must also be paid to the impact of declining deposit returns on household expectations. At present, deposit interest rates have gradually approached the year-on-year CPI growth rate. If deposit interest rates continue to decline, the real return on deposits held by households will further decrease. For the vast majority of households that use deposits as their main financial asset, a reduction in deposit interest rates may affect the returns on their existing financial assets. 3. Amid fluctuations in financial assets, the central bank needs to increase liquidity injection to offset the weakening of household asset reallocation behavior. 4. If the policy rate is kept stable and liquidity injection is increased, then given weak loan demand from enterprises and households, the new funds obtained by banks may be used more for bond allocation, and the yield curve may flatten further. 5. If the policy rate is kept stable and efforts are focused on maintaining an upward-sloping yield curve, then in order to control the decline in long-term bond yields, the intensity of liquidity injection may be constrained. 6. If liquidity injection is increased while maintaining an upward-sloping yield curve, then a subsequent policy rate cut may be an inevitable policy choice.
Financial Street meeting policies can marginally ease some constraints of the monetary policy impossible trinity through the following paths. 1. The switch in the main operation instruments is expected to reduce commercial banks' financing costs by shortening duration. 2. A moderate decline in short-end interest rates can expand some room for the central bank's liquidity injection. 3. Reform of the loan interest rate pricing benchmark is expected to reduce corporate financing costs by optimizing the pricing mechanism. 4. The non-bank liquidity support tool helps mitigate systemic risks under extreme scenarios.
Impact on the capital market. 1. For equity assets, unlike the September 24, 2024 policy, when the People's Bank of China, together with the China Securities Regulatory Commission, created two capital market tools to support the equity market, the tools from this meeting focus on liquidity risk in the bond market. The current dilemma in the equity market is that the process of amplified asset volatility suppresses the Sharpe ratio of stock assets, and the decline in the stock Sharpe ratio further affects households' willingness to reallocate deposits. Therefore, while volatility has not yet stabilized, the liquidity of the stock market objectively faces pressure. 2. For the bond market, the maturity switch of the main open market operation instruments objectively helps reduce commercial banks' financing costs, but bond market yields have recently fallen from 1.68% on September 30 to 1.65% on October 19. Considering that the timing of the switch is still unclear, the officially announced interest rate is also unclear, and whether it can produce a "quasi-rate cut" effect is also unclear, whether interbank liquidity can continue to be loose is more important for the impact on the bond market.
Risk warning: Monetary policy exceeds expectations.
Report Table of Contents
Main Text of the Report
I. Study and Reflections: Some Thoughts on Policy Regulation at the Financial Street Meeting
On October 19, 2026, Governor Pan delivered a keynote speech at the Financial Street Forum Annual Meeting, announcing several subsequent policy arrangements. Our understanding of several of these policies is as follows.
(1) Optimizing the Short-End Interest Rate Regulation Mechanism
Meeting statement: From the current situation, the interbank overnight repo rate has in fact become the target rate for the central bank's monetary policy regulation; but at the same time, the maturity of the central bank's main open market operation instruments and main policy rate is still 7 days, and the two are not fully consistent. In order to further improve the precision of interest rate regulation, we will study switching the maturity of the central bank's main open market operation instruments to overnight at an appropriate time, and the open market overnight repo rate will accordingly become the main policy rate.
First, in terms of operation mode, there is no difference between overnight reverse repo and seven-day reverse repo. Overnight reverse repo operations use a fixed rate and quantity tender. A fixed rate means the central bank determines the interest rate for the transaction in advance, and a quantity tender means primary dealers bid for the amount of funds they want, while the central bank announces the upper limit for the operation. This model is consistent with the 7-day reverse repo operation.
Second, in terms of the impact on commercial banks, the adjustment of the main operation instruments means that commercial banks reduce their marginal financing costs from the central bank by shortening duration, but whether it can produce a "quasi-rate cut" effect still depends on interest rate pricing and its transmission. Whether the marginal reduction in financing costs can subsequently be transmitted to interest rates of other maturities and varieties needs to be observed. If it can bring about a downward shift in the broad interest rate center, then this maturity switch will have a "quasi-rate cut" effect, but if it does not bring about a downward shift in the broad interest rate center, then this policy cannot achieve a "quasi-rate cut" effect. In addition, the shortening of the duration of the main operation instruments means that commercial banks' subsequent regulation of interbank liquidity is expected to become more precise, improving the transmission efficiency of policy rate signals.
Third, the timing of policy implementation and the initial pricing of the overnight operation rate still need to be further clarified. First, the specific implementation timing corresponding to the "appropriate time" stated by Governor Pan; second, the overnight reverse repo rate has not yet been officially announced by the central bank, and how it will be set subsequently remains to be seen.
(2) Exit the Deposit and Loan Benchmark Interest Rates and Promote Reform of the Loan Interest Rate Pricing Benchmark
Meeting statement on the reform of the loan interest rate pricing benchmark: "Over the past decades, the loan benchmark interest rate, the loan prime rate, and others have played a good role as loan pricing benchmarks in different periods in our country. Recently, under the guidance of the People's Bank of China, some financial institutions, after reaching agreement with clients through consultation, have introduced market interest rates such as the interbank overnight repo rate as the pricing benchmark for floating-rate loans, which has better met the market's diversified loan pricing needs and is also conducive to improving the efficiency of monetary policy transmission. In the future, as diversified loan pricing benchmarks continue to improve, some enterprises with strong financial capabilities may, after consultation with financial institutions, independently choose the interbank overnight repo rate or the loan prime rate as the pricing benchmark for floating-rate loans, and the loan prime rate can continue to play a role as the pricing benchmark for small enterprises and personal loans. The interbank overnight repo rate can also be considered as an option for the pricing benchmark of bonds and financial derivatives. The People's Bank of China will issue policy guidelines at an appropriate time to guide financial institutions in doing the relevant work well. At the same time, it will also continue to reform and improve the loan prime rate quotation mechanism and improve quotation quality."
Meeting statement on exiting the deposit and loan benchmark interest rates: "For a long time in the past, the central bank directly set the benchmark deposit and loan interest rates of financial institutions. With the advancement of interest rate marketization reform, the benchmark deposit and loan interest rates have gradually been replaced by market-based pricing benchmarks. Bank loan interest rates already have multiple pricing benchmarks such as the loan prime rate and the interbank overnight repo rate; since the beginning of the first quarter of this year, we have publicly announced the average deposit interest rates of various maturities as a reference for bank deposit pricing. The benchmark deposit and loan interest rates of financial institutions have not been adjusted for a long time since October 2015, and have in fact ceased to play a role in deposit and loan pricing. At present, they only remain as the basis for calculating interest in a small number of judicial fields. Next, the People's Bank of China will promote the replacement of the interest calculation basis in these fields with market-based interest rate indicators, realizing the exit of financial institution benchmark deposit and loan interest rates."
For the financing side, referring to the earlier PBOC column "International Experience in Loan Interest Rate Pricing Benchmarks": "Loans mainly have two typical pricing methods: fixed rate and floating rate. The interest rate of a floating-rate loan generally moves with the market during the contract period, is periodically repriced according to a fair interest rate indicator, and this pricing benchmark is specified in the contract. For fixed-rate loans, banks also need a reference benchmark to determine the specific value of the contract rate, but this reference benchmark is generally not reflected in the loan contract... Overall, the loan interest rate pricing benchmarks of major international economies have generally evolved from an initial single benchmark into a diversified benchmark interest rate system, in order to reflect changes in funding costs and credit risk and to adapt to different types of borrowers, loan varieties, and financing scenarios." Combined with the above column, as current financing becomes more diversified, the diversification of loan interest rate benchmarks is also a commensurate reform.
For the deposit side, deposit interest rates have undergone several adjustments. Referring to the earlier article "Liu Guoqiang: Better Leverage the Role of the Market Interest Rate Pricing Self-Discipline Mechanism," the article stated: "On October 24, 2015, the floating upper limit on deposit interest rates for commercial banks was no longer set, marking that administrative management of deposit interest rates had basically been lifted. The interest rate self-discipline mechanism strengthened self-discipline management of irrational pricing behavior such as high-interest deposit-taking, assisted in cleaning up and rectifying non-standard deposit innovation products, and included structured deposit interest rates and negotiated deposit interest rates in self-discipline management. In June 2021, implementing deposit interest rate marketization reform measures, the method for determining the self-discipline upper limit of deposit interest rates was changed from the benchmark interest rate multiplied by a certain multiple to adding basis points on top of the benchmark interest rate, eliminating the leverage effect. In April 2022, a market-based adjustment mechanism for deposit interest rates was established, guiding members of the interest rate self-discipline mechanism to reasonably adjust deposit interest rate levels with reference to changes in market interest rates." Under the above mechanism, current deposit interest rates have in essence already followed policy rate adjustments. As Governor Pan said, the deposit benchmark interest rate has basically ceased to play a role.
(3) Establishing a Liquidity Support Tool to Address Large-Scale Redemptions by Non-Bank Institutions
Meeting statement: Earlier, the People's Bank of China communicated with the market multiple times on this tool. The purpose of this tool is to establish a bond market stabilization mechanism and constitute a new tool for the People's Bank of China's macroprudential management. The tool comprehensively weighs the prevention of systemic risks in the financial market system and moral hazard, and is activated in specific scenarios when asset management institutions face group liquidity risk and the bond market experiences a negative feedback loop of redemption and selling; operations with the central bank must meet macroprudential requirements and provide high-grade collateral, preventing distortion of financial market pricing, the formation of a bailout illusion, and maintaining market discipline. Institutions applicable to the tool include bank wealth management subsidiaries, public fund managers, and the corresponding bank parent companies, securities parent companies, and others. We will clarify the relevant elements of tool operations in public open market operation announcements.
Compared with the statement at the Lujiazui meeting in June, at that time Governor Pan stated: "In September 2024, the People's Bank of China, together with the China Securities Regulatory Commission, created two tools to support the capital market, establishing a liquidity supply channel from the central bank to non-bank institutions and the capital market, which played a positive role. On this basis, we continue to study policy tools. When systemic pressure appears in markets such as bonds, normal liquidity channels are blocked, and institutions face group liquidity crises that may trigger systemic risk, emergency liquidity will be provided to non-bank institutions through swaps. The mechanism design will comprehensively weigh maintaining the stable operation of the financial market and preventing moral hazard in the financial market. 'Specific scenarios' mean that this mechanism is not a normalized liquidity supply to non-bank financial institutions; 'preventing moral hazard in the financial market' means that operations between non-bank institutions and the central bank must meet macroprudential requirements and must also provide high-grade collateral."
Combining the above statements: First, this tool focuses on liquidity risk in the bond market, not the equity market. Judging from the policy objectives and trigger conditions disclosed this time, the tool aims to address group redemptions by asset management institutions and the resulting bond selling pressure. Support arrangements for the equity market still mainly correspond to the two capital market tools created by the People's Bank of China together with the China Securities Regulatory Commission in September 2024.
Second, the policy wording has shifted from "continue to study" to "establish," meaning the tool is moving further toward implementation. The wording at the Lujiazui meeting in June was "we continue to study policy tools." This time, it explicitly proposed to "establish a liquidity support tool to address large-scale redemptions by non-bank institutions," and disclosed applicable institutions, activation conditions, and collateral requirements. Compared with before, the policy arrangement is more specific, and the implementation process is expected to accelerate.
Third, in terms of usage scenarios, the implementation of this tool is expected to alleviate the market's excessive concern about larger interest rate fluctuations. Combined with the increasing proportion of equity and bond financing in total social financing, the stability of long-term interest rates helps the reasonable pricing of financial assets. However, Governor Pan explicitly stated: "It will be activated in specific scenarios when asset management institutions face group liquidity risk and the bond market experiences a negative feedback loop of redemption and selling." This means that this tool is more akin to a tool for extreme scenarios, and smaller interest rate fluctuations will not trigger the use of this tool.
(4) Expanding the Scope of Institutions Eligible for the Standing Lending Facility (SLF)
Meeting statement: At present, the standing lending facility is mainly an open market operation tool through which the central bank provides collateralized financing to city commercial banks and rural financial institutions, with maturities of overnight, 7 days, and 1 month, mainly meeting temporary liquidity needs. On this basis, we will further include domestic foreign-funded legal-person banks, and at the same time clarify that national banks apply the same operational arrangements, achieving full coverage of domestic deposit-taking financial institutions. After domestic foreign-funded legal-person banks are included, they also obtain a central bank liquidity support channel, which helps them better conduct business.
What is the standing lending facility (SLF)? Referring to the central bank's statement, the main features of the standing lending facility are: first, it is initiated by financial institutions, and financial institutions can apply for the standing lending facility according to their own liquidity needs; second, the standing lending facility is a "one-on-one" transaction between the central bank and financial institutions, with strong targeting.
Looking ahead, as domestic foreign-funded legal-person banks are included in the scope of institutions eligible for the standing lending facility, this move is conducive to the gradual opening up of the financial market in the future.
II. Policy Understanding: The Current "Impossible Trinity" of Monetary Policy
In terms of understanding monetary policy, against the backdrop of weak real-economy credit financing, the central bank's monetary policy objectively faces an impossible trinity, namely that the central bank cannot simultaneously maintain a stable policy rate, increase liquidity injection, and maintain an upward-sloping yield curve.
(1) Unchanged Policy Rate vs. Increased Liquidity Injection vs. Maintaining an Upward-Sloping Yield Curve
If the policy rate is kept stable and liquidity injection is increased, the yield curve may flatten further. Given weak loan demand from enterprises and households, the new funds obtained by banks may be used more for bond allocation, pushing long-term bond yields down. If short-end interest rates still move around a relatively stable policy rate, the spread between long and short ends may narrow, and the difficulty of maintaining a reasonable term spread will rise accordingly.
If the policy rate is kept stable and efforts are focused on maintaining an upward-sloping yield curve, the intensity of liquidity injection may be constrained. Without cutting rates, in order to maintain an upward-sloping yield curve, the central bank needs to control the intensity and pace of liquidity injection to ease long-term bond allocation demand and downward pressure on yields. At this time, liquidity pressure in the capital market may further amplify.
If liquidity injection is increased while maintaining an upward-sloping yield curve, then cutting the policy rate may be an inevitable policy choice. If liquidity injection continues to push long-term rates down, then in order to maintain an upward-sloping yield curve, the central bank must adopt a policy rate cut.
(2) Under the Impossible Trinity, Our Current Understanding
Under the impossible trinity, what constraints do the above paths each face? First, maintaining an upward-sloping yield curve helps prevent risks in financial institutions and build reasonable macro inflation expectations. Combined with Governor Pan's reference at the Financial Street meeting to the 2024 Lujiazui Forum "China's Current Monetary Policy Stance and the Future Evolution of the Monetary Policy Framework," at that time Governor Pan said: "The rapid development of financial markets has also brought new challenges to the central bank. The risk event of Silicon Valley Bank in the United States启示 us that the central bank needs to observe and assess financial market conditions from a macroprudential perspective, promptly correct and interrupt the accumulation of financial market risks, and at present especially needs to pay attention to the maturity mismatch and interest rate risk of some non-bank entities holding large amounts of medium- and long-term bonds, maintain a normal upward-sloping yield curve, and maintain the market's positive incentive effect on investment."
Second, a policy rate cut naturally helps lower financing costs, but attention must also be paid to the impact of declining deposit returns on household expectations. As deposit interest rate pricing increasingly references changes in market interest rates, and commercial banks' net interest margins remain at low levels, policy rate cuts are often accompanied by deposit interest rate adjustments. At present, deposit interest rates have gradually approached the year-on-year CPI growth rate. If deposit interest rates continue to decline, the real return on deposits held by households will further decrease. For the vast majority of households that use deposits as their main financial asset, a reduction in deposit interest rates may affect the returns on their existing financial assets.
Third, amid fluctuations in financial assets, the central bank needs to increase liquidity injection to offset the weakening of household asset reallocation behavior. The current liquidity dilemma is that, as the Sharpe ratio of stock assets continues to decline, the earlier process of household deposits shifting toward financial assets may slow marginally, and some funds may flow back into deposits. This process will bring about a contraction in non-bank liquidity, thereby impacting the capital market. At this time, if the central bank does not increase liquidity injection to offset the slowdown in household deposit reallocation behavior, then the capital market may subsequently face greater liquidity pressure.
(3) Under the Impossible Trinity, the Difficult Balance of Monetary Policy
In summary, under the above policy trade-offs, combined with the relevant arrangements announced by Governor Pan, we understand that the central bank is still seeking a balance among liquidity support, household financial asset returns, and financial risk prevention. On the one hand, it needs to meet liquidity needs during fiscal bond issuance and financial market fluctuations; on the other hand, it also needs to pay attention to the impact of declining interest rates on the returns of households' existing financial assets and prevent risks that may arise from maturity mismatch and market fluctuations.
Specifically, the above policies may ease some constraints through the following paths: First, the shortening of the maturity of the main operation instruments is expected to marginally reduce bank financing costs. Although the maturity switch of the main operation instruments may not necessarily manifest as a "quasi-rate cut" effect, shortening duration objectively helps marginally reduce commercial banks' financing costs. Second, a moderate decline in short-end interest rates can expand some room for the central bank's liquidity injection. If a decline in short-end interest rates can ease the pressure of narrowing term spreads, the central bank can appropriately increase liquidity injection while also taking into account a normal upward-sloping yield curve. Third, reform of the loan interest rate pricing benchmark is expected to reduce corporate financing costs by optimizing the pricing mechanism. Even if the broad interest rate center has not yet shifted downward overall, adjustments to the pricing mechanism may still create conditions for marginal improvement in corporate financing costs. Finally, the non-bank liquidity support tool helps mitigate systemic risks under extreme scenarios. In specific scenarios where group redemptions trigger concentrated bond selling, this tool can provide liquidity support, interrupt the negative feedback loop in which redemptions and selling reinforce each other, and reduce the possibility of excessive contraction of non-bank liquidity evolving into systemic risk.
For specific content, please refer to the report "Hua Chuang Macro: The 'Impossible Trinity' of Monetary Policy — Reflections on Governor Pan's Financial Street Speech on October 19, 2026" released by Hua Chuang Securities Research Institute on October 20.
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