Standard Chartered says the People’s Bank of China is increasingly orienting day-to-day operations around DR001 rather than DR007, reflecting the interbank market’s reliance on overnight repos. The bank expects short-term money-market rates to trade mostly below the 7-day reverse repo policy rate, and anticipates a gradual shift towards an overnight policy-rate framework.

China’s 7-day reverse repo rate was set as the sole policy rate in mid-2024, but the PBoC began using DR001 from May 2025, when it released its Q1 Monetary Policy Implementation Report, to track how market rates deviate from the policy setting. In its Q1-2026 report, the central bank pledged to keep the overnight money-market rate close to the policy rate, reinforcing DR001’s role as the anchor and pointing to a possible move to an overnight policy rate to address the tenor mismatch between DR001 and the 7-day policy rate.

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Overnight Rate as the New Anchor

We are observing that the People’s Bank of China is clearly using the overnight rate (DR001) as its main operational anchor, even though the official policy rate is still the 7-day one. Recent market data from late May 2026 confirms this, with DR001 consistently trading around 1.65%, well below the 7-day policy rate of 1.80%. This shows a clear intention to keep short-term borrowing costs low and stable.

This shift simply reflects the reality of China’s interbank market, where overnight funding is king. Data from the China Foreign Exchange Trade System shows that overnight repo transactions now account for nearly 90% of the market’s total volume. By focusing on the DR001, the central bank is effectively managing the most critical part of the financial system’s plumbing.

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Implications for Market Participants and Policy Outlook

For derivative traders, this means we should expect continued low volatility at the very front end of the interest rate curve. The central bank’s commitment to stability suggests that strategies involving selling short-dated interest rate volatility, such as short-term swaptions or caps, are likely to be favorable. The PBoC’s frequent use of open market operations to prevent any spikes in the DR001 reinforces this view.

With the front end of the curve so firmly anchored, we see potential for the yield curve to steepen. This could happen if longer-term rates rise due to improving economic data, which recent industrial production figures suggest is a possibility. Therefore, we are positioning for curve steepener trades, such as receiving fixed rates on short-term swaps while paying fixed on longer-term ones.

We expect the PBoC will eventually make this operational preference official by formally adopting an overnight policy rate. This move would resolve the current mismatch and is likely being considered to better support an economy still seeking consistent momentum. While the timing is uncertain, the market has largely anticipated this shift, so the eventual announcement should not cause a major shock.