China’s Central Bank Changes Liquidity Management Tools


The People’s Bank of China just launched its sixth round of medium-term lending facilities (MLF) this year yet refrained from reverse repo operations, in what banking experts believe signals a shift in its liquidity management methods.

In order to supply the Chinese market with sufficient liquidity and offset the 234.5 billion yuan in MLF that mature on 18 April, PBC issued 495.5 billion yuan in MLF on 17 April for its sixth such operation this year.

China’s central bank opted to refrain on this occasion, however, from reverse repo operations, marking a break from the “MLF+reverse repo” method of liquidity adjustment that it’s long favoured.

PBC also made another break from precedent by not first publicising the MLF via its official Weibo account, or divulging information on which or how many financial institutions would be part of transactions.

According to industry observers the move marks a shift towards the more varied and flexible usage of different monetary policy tools by the PBC when seeking to stabilise Chinese liquidity.

The monetary policy committee of PBC said in the first quarter that it would implement stable and neutral monetary policy, and make use of multiple monetary policy tool to preserve the basic stability of liquidity in the Chinese economy.

At the Boao Forum for Asia PBC governor Zhou Xiaochuan warned of the perils of excessive liquidity in many countries following many years of quantitative easing.

“We should focus on structural reform and long-term strategic adjustments, and cannot rely excessively on monetary policy,” said Zhou.

Zhang Jun, chief economist of Morgan Stanley Huaxin, said to China Securities News that PBC’s neutral setting on monetary policy this year was directed primarily towards deleveraging the Chinese economy and tamping down systemic financial risk

According to Zhang domestic inflation and Federal Reserve rate hikes would not be the key drivers of PBC policy this year, and the central bank would primarily make use of open market operations for fine-tuning purposes.