China’s rate guidance calms markets without giving game away

Bloomberg

People’s Bank of China’s (PBOC) Governor Zhou Xiaochuan, who has likened monetary-policy communication to chess, is telling markets more about his moves as he makes them.
That doesn’t mean he’s ready to give the game away.
The PBOC’s regular cash injections are now coming complete with comments about their intent, helping to soothe markets just before the cash crunch that usually accompanies June regulatory inspections. The central bank has also recently put markets on notice with articles in its in-house newspaper, and offered guidance with open-market operation statements.
Taken together, these moves are showing signs of success by lowering borrowing costs: The three-month Shanghai Interbank Offered Rate eased for a fifth consecutive day Wednesday.
But economic policy has always been challenging to decipher in China, where Communist Party leaders manage one of the world’s most opaque central banks. Giving better guidance brings the PBOC closer to global peers and lets it steer the economy more smoothly. And it can ease the transition as Zhou continues giving markets a greater role in setting prices.
“The central bank has stepped up communication with markets to avoid unusual fluctuations and stabilize expectations,” said Wang Yifeng, an analyst at China Minsheng Banking Corp.’s research department in Beijing. “Promoting transparency and guidance is global consensus.”
With the economy showing signs of having peaked for this year in the first quarter, enhanced communication may be just one of the responses officials need in coming months as they try to rein in excessive leverage without derailing the expansion.
Zhou has also unnerved investors before, namely with his silence after the shock yuan devaluation in 2015, and soothed them, such as his return to the public stage after the ensuing rout. He told business publication Caixin last year that “good communication is never an easy thing,” adding that the PBOC has a strong willingness to better inform the public and the market.
Yet the central bank views speculators as opponents in a game, and it’s “unimaginable” for the PBOC to reveal its strategies to them, he said. “This is like a player who will never reveal his next moves to the opponent in a game of chess.”