At least traders now know where the People’s Bank of China stands. On Monday, the central bank announced its decision to intervene in short-term debt markets, following its previous week’s revelation about borrowing and selling longer-term government securities. These measures aim to maintain a stable currency, one of the bank’s primary mandates. However, this focus may come at the expense of fostering economic growth, another key directive. Ideally, cutting interest rates would boost growth, making government debt less attractive to investors. Consequently, investors would be more inclined to put their money into more productive ventures.
The challenge lies in resisting the traders who have been buying bonds, betting that the PBOC will ease monetary policy. It also conflicts with President Xi Jinping’s goals for China as a “financial power”: a strong currency and a strong central bank. Recently, the yuan has struggled, weakening over 10% against the dollar since the Federal Reserve began raising rates in March 2022. This drop has brought it close to its lowest level against the dollar since 2007. The PBOC’s new measures could provide some relief. By conducting temporary bond repurchase or reverse repo operations as needed, the central bank aims to ensure “reasonable and sufficient liquidity” in the banking system. This strategy will help tighten the band within which rates trade, giving the central bank greater control.
These tools, deployed for the first time in almost a decade, signal that no rate cuts are expected. The PBOC’s governor, Pan Gongsheng, will be looking for guidance from policymakers at the Communist Party’s Third Plenum next week to navigate this tricky dilemma.
CONTEXT NEWS
The People’s Bank of China announced on July 8 that it would start conducting temporary bond repurchase or reverse repo operations to ensure “reasonable and sufficient liquidity” in the banking system. These operations will take place between 4 pm and 4.20 pm Beijing time on weekdays, with overnight terms if necessary. Rates will be set at 20 basis points below and 50 basis points above the seven-day reverse repo rate. This new mechanism to influence short-term rates follows the PBOC’s July 1 announcement that it would soon begin borrowing sovereign bonds from primary traders in the open market.
