PBOC Says Interest Rates in Line With Economic Fundamentals

Updated on
  • China central bank posts monetary policy implementation report
  • Policy makers pledge to monitor possible financial risks

China’s central bank, which has held the benchmark interest rate at a record low for more than a year, said that the current level is in line with economic fundamentals.

The People’s Bank of China said monetary policy should not provide “too much” liquidity and should prevent pushing up debt and leverage levels, according to the third-quarter monetary policy implementation report published Tuesday.

“In general, current total money supply and interest rate levels match changes in economic fundamentals,” the central bank said in the report. “Monetary policy should remain prudent to not only support effective fund demand to avoid a radical decline in overall demand, but also to avoid providing too much liquidity, pushing up debt and leverage levels.”

Policy makers have increased fiscal stimulus as tepid global demand and slowing private investment weigh on the world’s biggest trading nation, and growth is on track to meet the leadership’s target of at least 6.5 percent this year. The easing cycle since late 2014 has been accompanied by a buildup in borrowing that’s increased debt to 247 percent of GDP, according to Bloomberg Intelligence. 

The PBOC said in the report that it will monitor possible financial risks and use multiple monetary policy tools with flexibility. The central bank also repeated its pledge to maintain a neutral and appropriate monetary and financial environment.

PBOC has relied more on its new policy levers, open market operations and mid-term lending tools, to provide liquidity since the beginning of this year as the reserve requirement ratio for major banks may have "relatively strong policy signals." A majority of economists in a recent Bloomberg survey estimate the next broad policy move will come via new channels, such as money market rates.

To read how the PBOC has shifted to a selective tightening, click here

Other actions that the central bank said it will take included:

  • Using multiple monetary policy tools with flexibility
  • Keep a neutral and appropriate monetary and financial environment
  • Strengthen the market’s role in deciding the yuan exchange rate
  • Enhance the flexibility of the yuan exchange rate in both directions

Policy makers have kept the one-year lending at 4.35 percent and the one-year deposit rate at 1.5 percent since in October 2015. Gross domestic product rose 6.7 percent in the third quarter from a year earlier, matching the first half pace. Factory-gate prices in September rose for the first time since 2012, as sales of industrial products are recovering and inventories are declining. .

— With assistance by Winnie Zhu, Stephen Tan, Jessica Sui, and Lorenzo Totaro

(Updates to add quote from statement in third paragraph.)
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