China relaxes monetary policy

BOFIT Viikkokatsaus / BOFIT Weekly Review 2016/09

China this week lowered by a half percentage point the reserve requirement on bank deposits. Since March 1, large banks must place 17 % of their deposits with the People’s Bank of China, while small and mid-sized banks must give 15 %. The cut should free up about $100 billion in yuan deposits for lending. Reserve requirement ratio was last lowered in October.

Besides lowering reserve requirement to boost lending, the PBoC injects short-term liquidity into the system through open market operations by buying securities from banks with a promise to sell them back (reverse repo). The central bank also has other monetary tools to help banks meet their liquidity needs and target lending, including the standing lending facility (SLF), medium-term lending facility (MLF) and pledged supplementary lending (PSL). 

Strong credit and money supply growth in January point to relaxed monetary policy stance. Short-term money-market rates (7-day), however, have remained at around 2.5 % since last summer and lowered reserve requirement appears to have had no immediate effect on interest rates. China’s monetary policy framework remains complex, which complicates the assessment of the monetary policy stance.

Environment for monetary policy is challenging. On the other hand, monetary policy is expected to support the government’s growth target, yet labour markets, price trends and the economy’s structural shift argue for embracing a lower growth path. Furthermore, China’s mounting debt problems, capital outflows and the depreciation pressure of yuan are not making it easier for the policymakers.

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