China’s Toolkit to Manage Monetary Policy: QuickTake Scorecard


Why Money Keeps Flowing Out of China

China’s central bank has assembled a unique -- and ever more complex -- toolkit to fine-tune the world’s second-biggest economy.

Once largely reliant on benchmark rates, the People’s Bank of China has in recent years used an expanding number of instruments to guide borrowing costs and create an interest-rate corridor. It has increased the frequency of its open-market operations, while officials have been more vocal in signaling policy intentions.

Here’s a look at some of the key weapons in the PBOC’s armory:

Open-Market Operations (OMO)

These contracts are the most frequently used and offer mainly short-term loans to banks. Depending on the size of the funds added and the amounts that mature, the operations can result in either a net injection or withdrawal of cash from the financial system.

While the tenors can range from seven days to several years, the one-week, 14-day and 28-day contracts are the most common. They have an immediate effect on the money market, pushing rates one way or the other. The PBOC said in February 2016 that it was moving to daily, rather than twice-weekly, OMOs to improve their effectiveness.

The operations are carried out using what are known as reverse-repurchase agreements, where banks use bonds as collateral to borrow funds from the PBOC and agree to return the money at a future date. The central bank also uses repurchase agreements, which drain cash, as well as bill sales in its OMOs.

Medium-term Lending Facility (MLF)

Introduced in September 2014, these give the PBOC more control of the amount and duration of funds held by banks, when compared with changing benchmark interest rates. The PBOC can tweak the interest rate on the funds, as it did on Jan. 24 this year, to deflate bubbles and reduce leverage. The loans come in three tenors: three, six and 12 months.

Standing Lending Facility (SLF)

This liquidity support tool is aimed mainly at small- and medium-sized financial institutions. It is similar to the Federal Reserve’s discount window and the European Central Bank’s Marginal Lending Facility. It was started in 2013 and its maximum maturity has been kept at one month or below for the past two years.

Pledged Supplementary Lending (PSL)

This program is used to fund the nation’s three policy banks for investment in areas including shantytown development. The term “policy banks” refers to the Agriculture Development Bank of China, China Development Bank Corp. and the Export-Import Bank of China, which are tasked with financing government projects.

Short-term Liquidity Operations (SLO)

Also introduced in 2013, these have maturities of no more than seven days and, as stated by the PBOC, are meant to address temporary fluctuations in the money market. However, with the central bank moving to daily open-market operations last year, the need for SLOs may have diminished.

Temporary Liquidity Facility (TLF)

The newest tool in the PBOC’s kit, the TLF has been used just once so far. On Jan. 20, the central bank said it had provided 28-day funds to some major commercial lenders to help ease a cash crunch before the Lunar New Year holidays. The cost of the new facility was around the same as for similar-term open-market operations. Details of the instrument have been sparse so far, with state-run broadcaster China Central Television saying on Jan. 21 that it doesn’t require any collateral.

Reserve-Requirement Ratio (RRR)

One of the traditional methods of controlling liquidity, changes to the percentage of deposits that banks must set aside as reserves can release or pull cash from the financial system. The effects are broad-based and can affect China’s currency by increasing or lowering the supply of currency, as well as encourage excessive lending in case of a reduction. The PBOC last cut the RRR in early 2016 to 17 percent for major banks, still among the highest in the world.

Benchmark Rates

Another set from the old guard, the PBOC’s one-year lending and deposit rates have been unchanged since October 2015. They form the basis upon which commercial banks set deposit rates for savers and lending rates for companies and for mortgages.


This is another form of lending to financial institutions that was adopted as early as 1984, when the PBOC officially become China’s central bank. In recent years, the proportion of relending in base money supply has been falling, and the central bank uses it mainly for structural purposes, such as to support the agricultural sector and for poverty relief.


The rediscount rate is the interest rate that the PBOC charges borrowers through commercial banks. It has remained unchanged for the past six years, data compiled by Bloomberg show.


There are a few other ways in which the PBOC manages liquidity that fall a little outside the definition of monetary policy. These include “window guidance,” where the central bank gives verbal orders to the nation’s biggest lenders. The advice can range from keeping the pace of loan growth to specific requirements on cross-border fund flows.

And then there are X-Repos, which allow lenders to submit bids for repos anonymously with rules prioritizing best prices and earliest bids. The PBOC instructs banks to offer X-Repos, where the “X” signifies anonymity, which it was said to have done on Dec. 20.

The Reference Shelf

— With assistance by Yuling Yang, Laurence Arnold, Jun Luo, and Helen Sun

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