MNI BRIEF: PBOC, MOF To Promote Treasury Trades Progressively

The People’s Bank of China and the Ministry of Finance's joint study and promotion of treasury trades in the central bank’s open market operations does not represent quantitative easing, said PBOC Governor Pan Gongsheng at the Lujiazui Forum in Shanghai on Wednesday.

The PBOC will include the purchase and sale of treasuries into its monetary-policy toolbox as a base currency injection channel and a liquidity management tool, and coordinate it with other strategies to create a suitable liquidity environment, said Pan, noting risks arising from the large holdings of medium and long-term bonds by some non-bank entities. (See MNI EM: PBOC Eyes CGB Selling To Curb Bull Bond Market)

The PBOC will likely consider using a certain short-term operating rate, such as the 7-day reverse repo rate, as the main policy interest rate and downplay the role of other longer-term rates to smoothen the interest rate transmission mechanism, he added.

In addition to clarifying the main policy rate, it is also necessary to narrow the width of the interest rate corridor moderately to send clearer interest-rate control signals to reassure the market better, Pan noted. The current corridor is relatively large with the rates of Standing Lending Facility and excess reserves being the upper and lower limit, he added.