How China’s Interest Rate Toolbox Is Evolving and Why

The approaching demise of the discredited London Interbank Offered Rate (Libor) is prompting major central banks globally to create new benchmarks. The People’s Bank of China wants to elevate another key rate in the interbank market -- the Depository-Institutions Repo Rate (DR) -- to benchmark status, partly to align itself with the shift in international practices. While details are still limited, the idea has attracted financial market interest.

The PBOC has been adding to its toolkit to manage monetary policy. In the open market, there’s the 7-day reverse repo and the Medium-term Lending Facility (MLF), two pivotal policy rates set by the central bank for its loans to commercial banks. For lending to the real economy, there’s the new Loan Prime Rate (LPR), introduced last year in part to help lower borrowing costs of companies and households.