China’s Central Bank Adjusts Open Market Tools

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The People’s Bank of China has adjusted the tools it employs to control liquidity via open market operations.

On 10 May PBOC conducted 110 billion yuan in reverse repos via interest rate tenders, in tandem with 47.6 billion yuan of pledged supplementary loans (PSL).

This marks the second occasion since April that the Chinese central bank has employed these two tools in tandem to augment liquidity.

According to some analysts, the use of these instruments signals an increasingly pronounced shift from the use of medium-term lending facilities (MLF’s) in tandem with reverse repos to adjust liquidity, to a new model involving PSL’s and reverse repos.

Their most recent deployment follows a slew of actions signally a shifting from MLF’s to PSL’s.

On 13 April PBOC announced it would conduct 110 billion yuan in reverse repos via interest rate tenders, in tandem with 83.9 billion yuan of pledged supplementary loans (PSL).

Soon afterwards on 17 April PBOC undertook 495.5 billion yuan in MLF operations to offset the  maturation of 234.5 of the instruments the following day and shore up market liquidity.

It marked the sixth time this year that the Chinese central bank conducted MLF operations, yet was not accompanied at that point by any reverse repo operations.

Earlier this month on 3 May PBOC chose to discontinue 230 billion yuan in maturing MLF’s, and only conducted open market operations in the form of 200 billion yuan of reverse repos.

PSL’s were first launched by PBOC in April 2014, with a view to creating a new source of funds characterised by long-term ability and reasonable cost.

The chief function of the PSL would be to provide large sums of longer maturity funds to financial institutions, as well as support key areas of the private economy and social undertakings.

In the view of analysts the PSL is more targeted and explicit in its purposes than the MLF.

Despite the ongoing shift in liquidity tools, analysts such as Zhang Jun, chief economist for Morgan Shidan Lihuaxin Securities,  expect monetary policy to remain steady and largely unaffected by fluctuations in inflation or Federal Reserve rates.

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