PBOC Adopts Daily Open-Market Operations, Enhancing Rate Signals

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How PBOC Pumping Money Into Markets Impacts Investors
  • Auction windows were scheduled to revert to twice a week
  • Central bank said to reduce rates on some medium-term loans

China’s central bank said it will start conducting open-market operations every business day, strengthening its influence on interest rates.

The People’s Bank of China introduced daily auctions from Jan. 29 to manage liquidity around the Lunar New Year holiday, a period in which surging demand for funds has led to cash squeezes in the past, and was due to revert to twice-weekly auction windows -- on Tuesdays and Thursdays -- from next week. It said the extension of the current schedule aims to improve the effectiveness of the operations, which adjust short-term liquidity in the banking system.

Policy makers are giving greater prominence to market-based tools to guide borrowing costs after China loosened restrictions on what banks could pay on deposits and charge for loans in the world’s second-biggest economy. The PBOC offered Thursday to cut rates on some medium-term loans it extends to banks, the second such move this year, a person familiar with the matter said.

“It helps PBOC to more efficiently adjust market conditions when needed,” said Becky Liu, senior rates strategist at Standard Chartered Plc in Hong Kong. “It’s a pre-step for the final completion of interest liberalization too, in the sense that it will help to more effectively set the interest-rate corridor. Short term money-market rates will hence be more stable.”

The PBOC has been trying to establish an interest-rate corridor to set borrowing costs after scrapping a ceiling on deposit rates in October. The central bank has hinted it will use the seven-day repurchase rate as the new benchmark rate, with its Standing-Lending Facility as the ceiling and the rate paid on excess bank reserves as the floor of the corridor.

The PBOC has told banks it can provide funds through its Medium-term Lending Facility at 2.85 percent for six-month loans, down from 3 percent, according to a person with direct knowledge of the matter. The one-year borrowing rate eased to 3 percent from 3.25 percent, according to the person, who asked not to be identified because the plans aren’t public.

Such a reduction would amount to a kind of monetary easing outside of traditional tools such as lowering benchmark lending or deposit rates or the reserve-requirement ratio for the biggest banks. Overuse of RRR cuts may add too much pressure on short-term interest rates and would therefore be bad for stabilizing capital flows and the exchange rate, PBOC researcher Ma Jun said in a China Business News report published last month.

PBOC’s Tools

"The PBOC is trying to find ways for monetary easing without making a high-profile interest-rate cut," said Louis Kuijs, chief Asia economist at Oxford Economics in Hong Kong. "There’re likely to be more following steps in a similar direction, since a single move will not be enough to turn around the momentum of the economy."

The PBOC didn’t respond to a request for comment on the proposed MLF rate reductions.

In shifting to daily open-market operations, the central bank said in Thursday’s statement that it will issue notices on the days that it refrains from offering repurchase agreements or reverse-repurchase agreements due to insufficient demand. The contracts typically have maturities of up to 28 days and involve short-term loans that can add or remove funds from the financial system.

"The real purpose is not so much to increase efficiency but liquidity through open-market operations," Iris Pang, a senior economist for greater China at Natixis SA in Hong Kong, wrote in a note. The reason to move away from traditional instruments such as the required-reserve ratio for big banks and interest-rate cuts to open-market operations may be to avoid giving one-off signals of easing, Pang said.

Room for Easing

China’s consumer price index climbed 1.8 percent in January from a year earlier, the National Bureau of Statistics said on Thursday. That was below the medium estimate of 1.9 percent. The producer-price index fell 5.3 percent, extending its run of declines to a record 47 months. “The data show that the economy is pretty weak,” said Larry Hu, head of China economics at Macquarie Securities Ltd. in Hong Kong.

The central bank is attempting to square the circle of supporting growth without using up limited monetary policy space or putting more downward pressure on the yuan,  said Bloomberg Intelligence economist Tom Orlik.

“That means more use of low-visibility instruments like the MLF to guide rates lower, rather than cuts in benchmark rates,” he said. “The trade off for low visibility, is the confidence-boosting effect on the market is reduced.”

The PBOC provided 110 billion yuan ($16.9 billion) of funds to 14 financial institutions on Aug. 19 via six-month MLFs, which would be due to mature this month. The monetary authority last conducted six-month and one-year MLF operations on Jan. 21.

Lower Rates

The seven-day repurchase rate, a gauge of interbank funding availability, fell four basis points to 2.25 percent, a weighted average from the National Interbank Funding Center shows. The six-month Shanghai Interbank Offered Rate was at 3.10 percent.

“The previous MLF interest rates were a bit high, so the central bank lowered the borrowing costs to lure lenders to use MLF,” said Qu Qing, Beijing-based fixed-income analyst at Huachuang Securities Co. “This would help lower companies’ financing costs, and further boost credit expansion.”

— With assistance by Xize Kang, Yinan Zhao, and Helen Sun

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