PBOC's Pledge to Open Tool Box Puts Focus on Less-Known Options

  • In Business
  • 2022-01-21 06:02:00Z
  • By Bloomberg

(Bloomberg) -- A pledge by China's central bank to open its monetary policy tool box wider to spur an economy under strain has fueled debate over its next move.

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With the People's Bank of China having already cut interest rates and the ratio of cash banks must hold in reserve, economists are betting authorities will turn to some of their lesser-known tools and adopt structural policies to boost credit expansion and domestic demand. That's on top of traditional measures, such as rate cuts, which are still on the cards too.

Read More: China Seen Cutting Rates Once More Before July, Analysts Say

Some say the PBOC could cut deposit rates, increase foreign exchange purchases or turn to its relending programs. Others say policy makers' promise to open the policy tool box is more of a signal to the market of their easing stance, rather than a commitment to take further action, arguing that a rebound in growth will require more supportive fiscal and industrial policies.

With the PBOC in full easing mode, here's a look at some of the potential tools it could use next:

Traditional Steps

The PBOC is widely expected to cut policy interest rates again, including its one-year medium-term lending facility rate and the seven-day reverse repurchase rate, as well as reduce the reserve requirement ratio in coming months.

Citigroup Inc. expects a total of 25 basis points of policy rate reductions and a 50-basis point RRR cut in the first half, while Nomura Holdings Inc. forecasts another 10 basis points of policy rate cuts in the first half and 50 basis points of RRR reduction in the next few months.

The interest rate of another short-term policy loan, the standing lending facility, could also be cut by 10 basis points for each of the three tenors, according to Li Chao, chief economist at Zheshang Securities Co. The rate on the loans is considered the upper bound of China's interest rate corridor and usually moves in tandem with the seven-day reverse repurchase rate.

Reuters reported the SLF rate will be lowered Friday, citing people it didn't identify with knowledge of the matter.

"The new rate cutting cycle will likely continue in the next six months," Macquarie Group Ltd. economists led by Larry Hu wrote in a note Thursday.

Structural Tools

Structural measures have played an increasingly important role in the PBOC's policy mix in recent years. They include the relending program, in which the PBOC provides loans to commercial banks for lending to smaller businesses and agricultural firms, and a new program targeting green projects introduced in November.

The PBOC could expand the quota of the relending program and make greater use of the green financing tool, Li of Zheshang Securities said. Wang Yifeng of Everbright Securities Co. said the interest rates of the relending program could be cut further after a reduction in December. Bruce Pang of China Renaissance Securities Hong Kong also expects more details on the green tool before the annual legislative sessions in March.

Deposit Rate

The PBOC hasn't changed the benchmark deposit rate, at 1.5% currently, since 2015, when it started to liberalize bank deposit rates. It adjusted how lenders can set their deposit rates last year in an effort to lower longer term fund costs.

PBOC Deputy Governor Liu Guoqiang said earlier this week that high deposit rates and "disorderly" competition among banks could prevent borrowing costs from falling. Capital Economics Ltd.'s Julian Evans-Pritchard and colleagues expect the PBOC to either cut the benchmark rate by 10 basis points this year or reduce the amount of basis points that banks can add to the benchmark.

FX Purchases

Buying or selling foreign exchange used to be a major way the PBOC managed yuan liquidity before it reduced its regular intervention in the exchange rate in 2017. The PBOC's purchases of foreign exchange assets from commercial banks only picked up slightly in the past year despite record capital inflows, as indicated by the balance of yuan funds outstanding for foreign exchange held by the PBOC.

Lu Ting, chief China economist at Nomura, expects the PBOC to significantly step up its net purchases of foreign exchange in the coming months, arguing that it can add liquidity to the economy and at the same time limit further yuan appreciation.

Read More: From Fixing to Signaling, How China Manages the Yuan: QuickTake

Administrative Tools

The PBOC could adjust its macro-prudential assessment of banks to relax restrictions on lending or encourage more loans to sectors such as green firms, small businesses and the manufacturing sector, according to Li of Zheshang Securities. It can also use "window guidance" to order banks to expand lending, or potentially relax credit policies in the property sector, he said in a note.

Expectation Management

To be sure, some economists believe the PBOC won't have more effective tools to use because reversing the economic slowdown will require more than monetary easing.

Xing Zhaopeng, senior China strategist at Australia & New Zealand Banking Group Ltd., said the "tool box" phrase is meant to stabilize market expectations. The key problem of the economy is supply-side constraints and insufficient demand, which won't be solved just by monetary policy, he said.

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