PBOC Preparing Policy Tools to Manage Rates

China’s central bank is preparing policy tools to manage market-based interest rates and their use will require collateral from banks to conform with international practices, Governor Zhou Xiaochuan said.

“After rates are liberalized, the central bank will need an effective monetary-policy transmission mechanism in the money market,” Zhou said in a press briefing today during U.S.-China economic talks in Beijing. He highlighted the European Central Bank’s long-term refinancing operations as something similar to what the PBOC is adopting and said central banks generally demand collateral when using such methods.

The remarks suggest the PBOC is progressing on the creation of policy tools to anchor money-market rates after the central bank removed lending-rate controls a year ago and started on a course of liberalizing savings rates, a process Zhou reiterated today can be finished in two years. Successful tools would reduce rate volatility that’s added to strains in the economy this year and last year.

“Some central banks, for the purposes of financial stability and structural adjustment, have launched some new policy tools,” Zhou said. Some, such as the ECB’s targeted long-term refinancing, are similar to the tools that the PBOC is adopting, he said.

One of the “two to three” tool sets China is preparing will be to manage liquidity to affect short-term interest rates, and another set is for managing medium-term rates, Zhou said today. He said two months ago that the PBOC will consider adopting a short-term interest-rate range as well as a medium-term policy rate.

Yuan Intervention

The central bank will reduce its intervention in the yuan’s exchange rate “when conditions are ready,” Zhou said, adding that “after the global financial crisis, international markets are not very calm with frequent problems.” The comment builds on Finance Minister Lou Jiwei’s remarks yesterday that China can’t stop intervention yet because economic growth is too weak and capital flows aren’t steady enough.

Customs data released today showed China’s exports trailed estimates in June, suggesting support for growth from global demand will be limited as leaders try to defend their economic-expansion goal of about 7.5 percent this year. Overseas shipments rose 7.2 percent from a year earlier, below the 10.4 percent median estimate in a Bloomberg News survey of analysts.

To contact Bloomberg News staff for this story: Xin Zhou in Beijing at xzhou68@bloomberg.net

To contact the editors responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net Scott Lanman

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