Beijing / Bloomberg
The People’s Bank of China (PBOC) should gradually adjust the amount of deposits that lenders lock away as reserves in accordance with the nation’s international balance of payments situation, according to economists at the central bank.
The required reserve ratios (RRR) for commercial lenders should be raised or lowered to meet the country’s macroeconomic demands, researchers led by Ma Jun, chief economist at the central bank’s research bureau, wrote in a working paper published on the PBOC’s website.
China should develop new policy tools to improve the interest-rate mechanism and further develop derivatives, including government bond futures and interest-rate swaps to allow banks hedge their risks, they added.
Adjustments to the RRR could help the central bank manage liquidity in the banking system during times of volatile capital flows.
The PBOC in February said it will explore an interest-rate corridor to guide the country’s borrowing and lending costs as it aims for market-oriented interest-rate benchmarks to help the economy recover from
its slowest growth in the quarter
The central bank last year scrapped a ceiling of one-year deposit rate in a step to liberalize interest rates, and offered a series of short-term rates to guide banks.
While changes in China’s short-term market rates can influence bank lending rates, the efficacy of China’s transmission system may be only 20 to 80 percent of that in the US, the economists wrote, citing their empirical study.
The economists also suggested in the paper that China should encourage sales of certificates of deposit and assets secularization.
PBOC is the central bank of the People’s Republic of China with the power to control monetary policy and regulate financial institutions in mainland China. The People’s Bank of China has more financial assets than any single public institution, and is second only to the Federal Reserve System of the United States in terms of overall central bank assets.
The PBOC has established nine regional branches, one each in Tianjin, Shenyang, Shanghai, Nanjing, Jinan, Wuhan,Guangzhou, Chengdu and Xi’an, two operations offices in Beijing and Chongqing, 303 municipal sub-branches and 1809 county-level sub-branches.