A processing error which triggered a sudden spike in one of China’s key benchmark rates has highlighted a lack of transparency at Chinese central bank and the inadequacy of existing measures for communicating policy shifts.
At the start of Wednesday 23 August the seven-day weighted average repo rate saw a sudden spike of 55 basis points to 3.44 percent, which would have marked its biggest increase since April 2015.
The National Interbank Funding Center subsequently announced that the price surge was not deliberate, but instead the result of a data error.
Due to the opacity of the People’s Bank of China and its prior history of sudden rate changes, however, many observers erroneously interpreted the leap as a surprise policy move, causing widespread confusion on the market.
The market confusion was further exacerbated by the fact that the one-week repo rate is generally considered a key signal of PBOC policy, while the central bank has recently driven up rates and tightened liquidity as part of the Chinese govenrment’s ongoing deleveraging campaign.
“The tricky thing about what happened Wednesday was that the open prices were surprising, but at the same time not impossible,” said Zhou Hao, senior emerging markets economists at Commerzbank AG in Singapore to Bloomberg.
The People’s Bank of China is ranked as one of the least transparent central banks amongst leading Asian economies by Bloomberg Intelligence, and has in the past availed itself of shock rate shifts as tool for sending policy signals.
A key example of this was PBOC’s raising of the overnight repo rate to an unprecedented high in June 2013 in order to stress test lenders, even while no explicit change was made to its goal of “prudent” monetary policy.
While the Chinese central bank has since sought to improve its public communications, market observers feel that the clarity of its signalling remains hampered by issues such as the welter of statements issued by multiple PBOC officials.
“The PBOC has made great progress in becoming more transparent and improving public communication,” said David Loevinger of TCW Group and a former China specialist with the US Treasury to Bloomberg.
“Still, while there’s a lot of statements coming from various PBOC officials, it’s sometimes hard to discern who’s speaking with authority.
“All central banks have struggled with market guidance; still, by almost any measure the PBOC remains among the least transparent”