Chinese Central Bank Outlines Efforts to Improve Execution of Monetary Policy


A senior official from the People’s Bank of China (PBOC) has published a paper on its official website outlining current plans to improve the execution of Chinese monetary policy.

The essay “Improving the Modern Monetary Policy Framework” (健全现代货币政策框架), written by PBOC’s monetary policy chief Sun Guofeng (孙国峰) and published on 13 January, states that upcoming efforts to improve China’s monetary policy framework will focus on three areas in particular including:

  • Optimisation of monetary policy targets,
  • Innovation of monetary policy tools,
  • “Clearing out” of monetary policy transmission mechanisms.

According to Sun the “optimisation of monetary policy targets” must have the final target of “maintaining stability in the value of the currency, and improving anchoring methods for intermediary targets and the achievement of operating targets by the central bank policy interest rate system.”

“Improvements must be made to the central bank policy interest rate system, with the use of open market operating rates for short-term policy rates and medium term lending facility (MLF) rates for medium-term policy rates,” wrote Sun.

“The Chinese central bank will use this policy rates system to influence market rates, and the loan prime rate will be formed in accordance with market-based methods on the foundation of MLF rates.

“The use of the LPR by banks for pricing will influence the actual execution of lending rates, collectively forming a market-based interest rate formation and transmission mechanism.

“This will be used to adjust the supply and demand of funds and the allocation of resources, and to achieve monetary policy targets.”

Tao Jin (陶金在), deputy-chair of the Macro-economic Research Centre of the Suning Financial Research Institute, said that the reforms outlined by Sun are for the purpose of increasing the market’s role in determining interest rates without granting banks too much free rein for action.

“The Chinese central bank favours adjustments to policy rates, as these operating targets are of greater benefit to ensuring that interest rates are ‘determined by the market, but can still be controlled.'”

The loan prime rate (LPR) (贷款市场报价利率) in China is the lending rate provided by commercial banks to their highest quality customers, and serves as the benchmark for rates provided for other loans.

The National Interbank Funding Center (全国银行间同业拆借中心) publishes the LPR at 9:30 am on the 20th of each month, after first collecting quotes from a group of 18 reporting banks and calculating the average of these quotes following exclusion of the lowest and highest quotes.