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Xi’s mysterious plans for PBOC take shape in biggest change in years
(Bloomberg) — It all started with a cryptic quote from President Xi Jinping buried in a 172-page book about the financial sector. Three months later, plans are beginning to emerge for the biggest change in years in the way China conducts monetary policy.
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Pan Gongsheng, governor of the People’s Bank of China, acknowledged in the clearest terms on Wednesday that the monetary authority is studying the trading of government bonds on the secondary market as a way of regulating liquidity. The BPC is studying implementation with the Ministry of Finance and it will be a gradual process, he said in a speech.
This responds to Xi’s directive to “enrich the monetary policy toolbox” and “gradually increase the buying and selling of government securities in the central bank’s open market operations” in a speech during a financial policy meeting last year, made public only in the book published in March.
Additionally, Pan suggested other changes to the interest rate system. The bank may consider switching to a single short-term rate to guide markets. It is also considering narrowing the corridor within which market rates can fluctuate to signal a clearer policy objective.
It is true that all these measures aim to improve the technical tools that the BPC uses to manage interest rates and currency. They won’t necessarily help answer some of the big questions confronting Chinese policymakers right now – like whether credit can support the economy when households and businesses aren’t eager to take on more debt, or how to ease borrowing costs without weaken the economy. yuan. Many details remain vague, as does the timeline for changes.
PBOC observers see the proposals as part of a long-running effort in which the central bank ultimately seeks to steer market interest rates rather than set them directly – and a step further from the command economy, where authorities determined both the price and quantity of money. credit. Pan said Wednesday it’s time to pay less attention to goals like the pace of loan growth because lending by property developers and local governments is declining as part of the economy’s transition.
“Switching to a short-term interest rate that is linked to the financial market as the main policy rate would be an obvious additional step in the gradual reform of China’s monetary policy framework,” said Louis Kuijs, chief Asia economist. Pacific from S&P Global. Assessments. “This would make the framework simpler and more transparent and bring it closer to the ‘industry standard’ practiced in most advanced economies.”
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One conclusion that many analysts drew from Pan’s speech is that the BPC is preparing to minimize what has been one of its main instruments: one-year policy loans, known as the medium-term lending mechanism. Since it was introduced a decade ago, the FML has become an important channel for the central bank to inject money into the economy and guide market rates.
But in recent months, banks’ demand for these funds has declined as it has become cheaper for them to borrow from each other. The MLF interest rate has remained stable for 10 months, even as other borrowing costs in the economy have fallen – in part because the PBOC is wary of currency depreciation.
What’s more, MLF is also only available to select banks. By buying and selling sovereign bonds as an alternative way to manage liquidity, central banks can influence financial conditions across a wider range of market participants. And compared to the MLF, the rate on seven-day reverse repos – short-term loans available daily to banks – offers more flexibility for fine-tuning policies.
Pan may believe that China’s rates market is now mature enough for the central bank to stop using multiple anchors to guide it, according to Serena Zhou, senior China economist at Mizuho Securities Asia Ltd.
The Financial News, a newspaper run by the PBOC, on Thursday cited unnamed industry experts as saying the central bank should weaken the link between the MLF — which represents banks’ funding costs — and the prime lending rate, a reference for loan rates in real. economy. The latter is more important because borrowers’ real costs are more important for economic growth, according to the report.
Currently, LPRs are based on the interest rates that 20 banks offer their best customers. They are quoted as a spread over the MLF rate.
A likely objective is to ensure a smoother transmission mechanism from short-term to longer-term interest rates.
The PBOC’s current setup of using two policy rates – the seven-day reverse repo and the MLF – reduces the signaling effect of its monetary decisions, argued economists at Macquarie Group Ltd., led by Larry Hu, in a report on Thursday. fair.
Furthermore, the current interest rate corridor constructed by the PBOC – the range within which market rates are supposed to fluctuate – is too wide, they said, leading to a highly volatile market for seven-day interbank loans compared to very low rates. more stable. in the USA and Europe.
–With assistance from Fran Wang, Wenjin Lv and Katia Dmitrieva.
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