Will Chinese Monetary Policy Shift towards Reserve Ratio Cuts + MLF + Rate Hikes?


Observers says that the Chinese central bank’s recent decision to expand the scope of accepted guarantees for a key open market instrument could be part of a broader shift in the implementation of monetary policy.

The People’s Bank of China (PBOC) recently announced that it would expand the scope of accepted collateral for its medium-term lending facilities (MLF) to include AA+ and AA grade bonds, as well as loans to small and micro-enterprises or for environmental and agricultural undertakings.

In a recent essay Zhang Chao (张超), an economist with the China Development Bank, said that in the near-term China’s monetary policy could shift towards a three-part method comprised of “required reserve ratio cuts + MLF + interest rate hikes,” as part of efforts to optimise maturities and “replace the short with the long,” as well as stabilise the value of the renminbi.

According to Lu Zhengwei (鲁政委), chief economist at Industrial Bank Co., the increase in accepted guarantees does not signal a loosening of monetary policy, but is instead a “policy measure that spurs an adjustment towards high-quality growth in China’s economic structure.”

The state-owned Economic Information Daily said that “the expansion in MLF guarantees has the intention of restoring the normal re-financing role of the bond market…but overall the basic tone of stable and neutral monetary policy hasn’t changed at all.”

Shi Lei (石磊), vice-general manager of the fixed-income department of Pingan Securities, said that PBOC has already used a reduction in the MLF rate to signal its policy intentions, in order to guide a decline in medium and long-term rates, stabilise short-term fund rates and reduce financing costs for the real economy.