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CNY Receives A Boost from PBoC



As hinted by sources over the weekend, the PBoC eased monetary policy again in the early hours of Monday morning trade, as it looks to provide further support to China’s coronavirus hit economy.


The PBoC injected 200bln CNY into the Chinese financial system via its 1-year medium-term lending facility and cut its interest rate by 0.1%.


This comes after China last week vowed that it would meet its 2020 economic targets and reduced local government debt restrictions in the near term to aid growth.


The move gave a mild boost to global risk appetite; CNY led risk-sensitive assets AUD, EMFX, global stocks, and crude markets higher.


The central bank also injected 100bln CNY in liquidity through seven-day reverse repurchase agreements. However, roughly 1trln CNY in reverse repurchase agreements were due to be repaid to the PBoC from banks on Monday. Therefore, approximately 700bln CNY was drained from the Chinese financial system on Monday.


PBoC explainer


Like the majority of the world’s major central banks, the PBoC has a mandate of maintaining price stability and promoting sustainable economic growth through the management of monetary policy.


Unlike other major global central banks, the PBoC does not have one single primary tool to control monetary policy (such as a key interest rate). Instead, it has multiple devices, including (but not limited to) open market operations, reserve requirement ratios, and a standing and medium-term lending facility.


Open Market Operations (or OMOs)

 

According to a recent CNBC article on the matter, “OMOs mostly involve two processes called repurchase or reverse repurchase agreements. The former term, as it is used in China, means removing liquidity from the system when the PBoC sells short-term bonds to some commercial banks. It also does the opposite for a “reverse” repurchase agreement, buying up those contracts, so banks have more cash on hand. Those operations allow the PBOC to control money supply and interest rates on a short-term basis — the assets are normally offered on time frames ranging from seven to 28 days.” By pumping more liquidity into the system, the PBoC will push down interest rates. Allowing liquidity to drain will push up short-term interest rates.


Reserve Requirement Ratios (or RRR)


This refers to the amount of money Chinese banks must hold in reserve as a proportion of their total deposits, i.e. the proportion of money that they are not allowed to lend. Reducing the RRR will stimulate the economy by allowing banks to lend more, and vice versa.


Standing Lending Facility (SLF) and Medium-term Lending Facility (MLF) 


The PBoC uses the SLF and MLF as a way of lending to banks on a longer timeframe than it would otherwise be able to through normal open market operations. As with OMOs, the more liquidity pumped into the system, the more interest rates will be suppressed, and the Chinese economy will be stimulated.


The PBoC also controls the official USDCNY exchange. However, CNH, the offshore version of CNY, is not controlled by the PBoC. Therefore, it is more representative of China-related sentiment, which is why we often quote it instead of USDCNY.


What this all means for the markets?


When the PBoC eases monetary policy by conducting operations to push interest rates lower and increase lending, this is taken as dovish by the markets. The market’s reaction to a dovish PBoC is the same as with any other major central bank; stocks and Chinese bonds will be buoyed. Typically, CNY will be weakened, but sometimes stimulus will be seen as good for the Chinese economy and actually result in CNY strength, as has been seen in the aftermath of today’s MLF rate cut.



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