China’s central bank will maintain ‘policy continuity and stability’

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China’s central bank, the PBOC, is exploring ways of creating an interest rate corridor to guide expectations for lending and borrowing costs, continuing the process towards adopting full-fledged market-based interest rates.

In its latest quarterly monetary policy report released over the weekend, the bank also acknowledged that it will maintain “policy continuity and stability”, suggesting that its policies would be forward-looking, allowing it to carry out policy fine-tuning in a timely and appropriate manner to adapt its aggregate demand management to supply-side structural reform.

The PBOC will use a string of monetary policy tools, including liquidity and price management, to create a financial environment conducive to the Chinese economy’s restructuring and upgrading, said the state-run Xinhua news agency.

According to Xinhua, the PBOC also vowed to improve efficiency of financial operations to better serve a real economy, while guarding against financial risks.

The PBOC, like many central banks worldwide, finds itself in a difficult position at present, tasked with balancing policy to allow for large-scale supply side reforms to the nation’s industrial sector to take place without spurring additional financial risk through increased private sector leverage and heightened risk of capital flight on expectations for even looser monetary policy settings.

The PBOC statement preceded the release of Chinese FX reserves data for January, something that revealed a further decline of $99.5 billion to $3.23 trillion.

Expectations for further weakness in the renminbi, partially as a result of looser monetary policy settings within the nation, have seen Chinese reserves decline by $582.5 billion over the past 12 months.

“While the remaining reserves represent a substantial war chest, the rapid pace of depletion in recent months is simply unsustainable,” Rajiv Biswas, Asia-Pacific chief economist at IHS Global Insight in Singapore told Bloomberg.

“Domestic private investors and global currency traders see a one-way bet against the currency. This has resulted in large-scale private capital outflows since early 2015 as expectations mount that the PBOC will eventually be forced to capitulate once its reserves are sufficiently depleted,” he said

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