PBOC’s pledge to open tool box puts focus on less-known options

Bloomberg

A pledge by China’s central bank to open its monetary policy tool box wider to spur an economy under strain has fueled debate over its next move.
With the People’s Bank of China (PBOC) having already cut interest rates and the ratio of cash banks must hold in reserve, economists are betting authorities will turn to some of their lesser-known tools and adopt structural policies to boost credit expansion and domestic demand. That’s on top of traditional measures, such as rate cuts, which are still on the cards too.
Some say the PBOC could cut deposit rates, increase foreign exchange purchases or turn to its relending programs. Others say policy makers’ promise to open the policy tool box is more of a signal to the market of their easing stance, rather than a commitment to take further action, arguing that a rebound in growth will require more supportive fiscal and industrial policies.
The PBOC is widely expected to cut policy interest rates again, including its one-year medium-term lending facility rate and the seven-day reverse repurchase rate, as well as reduce the reserve requirement ratio in coming months.
Citigroup Inc expects a total of 25 basis points of policy rate reductions and a 50-basis point RRR cut in the first half, while Nomura Holdings Inc. forecasts another 10 basis points of policy rate cuts in the first half and 50 basis points of RRR reduction in the next few months. Macquarie Group Ltd. says the new rate-cutting cycle will likely continue over the next six months.
The interest rate of another short-term policy loan, the standing lending facility, was also cut by 10 basis points this week. The rate on the loans is considered the upper bound of China’s interest rate corridor and usually moves in tandem with the seven-day reverse repurchase rate.
Structural measures have played an increasingly important role in the PBOC’s policy mix in recent years. They include the relending program, in which the PBOC provides loans to commercial banks for lending to smaller businesses and agricultural firms, and a new program targeting green projects introduced in
November.
The PBOC could expand the quota of the relending program and make greater use of the green financing tool, Li of Zheshang Securities said. Wang Yifeng of Everbright Securities Co. said the interest rates of the relending program could be cut further after a reduction in December. Bruce Pang of China Renaissance Securities Hong Kong also expects more details on the green tool before the annual legislative sessions in March.
The PBOC hasn’t changed the benchmark deposit rate, at 1.5% currently, since 2015, when it started to liberalize bank deposit rates. It adjusted how lenders can set their deposit rates last year in an effort to lower longer term fund costs.
PBOC Deputy Governor Liu Guoqiang said earlier this week that high deposit rates and “disorderly” competition among banks could prevent borrowing costs from falling. Capital Economics Ltd.’s Julian Evans-Pritchard and colleagues expect the PBOC to either cut the benchmark rate by 10 basis points this year or reduce the amount of basis points that banks can add to the benchmark.