China's Central Bank Signals Addition of New Policy Tools

  • Central bank intends new tools to help clarify monetary policy
  • Monetary policy report: more coordination to safeguard system

China’s central bank, already wielding an increasingly complicated suite of monetary policy tools, signaled that it’s likely to add even more to the mix.

The People’s Bank of China said it will "enrich" the maturities of reverse repurchase agreements to ensure the stability and neutrality of funding in the financial system, according to a quarterly monetary policy implementation report released late Friday in Beijing. The report is mainly a review of monetary policy conducted in the second quarter.

The PBOC said it’s considering new tenors to "avoid misinterpretation" of prudent and neutral monetary policy settings as it adjusts market liquidity to offset external factors such as fiscal revenue, government spending, and market expectations. Such external influence on liquidity has amplified as financial markets grow, it said, without identifying any specific duration for the agreements.

Read More: PBOC Sheds Light on the Fiscal Factor as It Seeks Market Calm

The central bank is signaling that "it’s going to add new operation tools in the near future," Ming Ming, head of fixed income research at Citic Securities Co. in Beijing and a former PBOC official, wrote in a note Saturday.

With new tenors, funding levels will "tend to be more stable in the second half," he said, adding that the PBOC is likely to make the less-than-seven-days Short-term Liquidity Operations routine and add operations with a two-month tenor.

The PBOC has been managing interbank liquidity with its suite of monetary policy tools while keeping traditional benchmark interest rates and required reserve ratios on hold since at least February 2016. It currently has seven-, 14- and 28-day operations on the open market, and three-month to one-year operations to meet mid-term liquidity demand.

The central bank also said in Friday report it’ll step up coordinated oversight of important institutions and monitor the impact of changes in global markets on liquidity in China. 

Read More: PBOC to Boost Coordinated Oversight of Key Financial Firms

In addition, it will include interbank certificates of deposit issued by banks with assets over 500 billion yuan ($75 billion) under the macro-prudential assessment framework starting in the first quarter of next year, the latest move toward defusing risks before a key gathering of Communist Party leaders in the fall.

— With assistance by Yinan Zhao, and Xize Kang

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