- Research bureau chief economist Ma Jun among authors of paper
- Adjustment should be in line with balance of payments, it says
The People’s Bank of China should gradually adjust the amount of deposits that lenders lock away as reserves in accordance with the nation’s international balance of payments situation, according to economists at the central bank.
The required reserve ratios for commercial lenders should be raised or lowered to meet the country’s macroeconomic demands, researchers led by Ma Jun, chief economist at the central bank’s research bureau, wrote in a a working paper published on the PBOC’s website. China should develop new policy tools to improve the interest-rate mechanism and further develop derivatives, including government bond futures and interest-rate swaps to allow banks hedge their risks, they added.
Adjustments to the RRR could help the central bank manage liquidity in the banking system during times of volatile capital flows. The PBOC in February said it will explore an interest-rate corridor to guide the country’s borrowing and lending costs as it aims for market-oriented interest-rate benchmarks to help the economy recover from its slowest growth in a quarter century. The central bank last year scrapped a ceiling of one-year deposit rate in a step to liberalize interest rates, and offered a series of short-term rates to guide banks.
While changes in China’s short-term market rates can influence bank lending rates, the efficacy of China’s transmission system may be only 20 to 80 percent of that in the U.S., the economists wrote, citing their empirical study.
The economists also suggested in the paper that China should encourage sales of certificates of deposit and assets secularization.
— With assistance by Xiaoqing Pi