MNI INTERVIEW: PBOC Could Shift Policy Focus To Market Rates

--Current Benchmarks Are Not Serving As Market Guides, Former SAFE Official Says

--PBOC Could Focus More On 7-Day Repo Rate, Guan Tao Tells MNI

     BEIJING (MNI) - The People's Bank of China may put more emphasis on market

benchmark rates in its monetary policy framework, particularly the 7-day repo

rate, shifting its focus from its lending and deposit rates, a former top

foreign exchange regulator told MNI.

     The current benchmarks are not serving as a guide to financial markets

because the PBOC has not touched them since 2015, Guan Tao, former Director

General of Balance of Payments at the State Administration of Foreign Exchange,

said in an interview.

     "It would be possible for the PBOC to choose one or several active money

market rates as policy rates," said Guan, who worked at SAFE until 2015 and is

now a senior fellow of China Finance 40, a prominent think tank, noting that the

central bank should take the exchange rate into consideration when setting

policy.

     The PBOC has been trying to build an interest-rate corridor, with its

standing lending facility rate as the ceiling and the excess reserve

requirements ratio as the floor, PBOC governor Yi Gang said in a speech in

December, stressing that the 7-day interbank repo rate for depository

institutions was a key influence in the market.

     "Most of the time DR007 should fluctuate within the range of corridor, but

there have been exceptions," Guan said, using market terminology for the rate.

     --RRR CUTS

     Guan noted that ongoing reductions in banks' reserve requirement ratios

should not be seen as directly equivalent to a full-scale policy easing. After

four such reductions in 2018, the PBOC announced earlier in January a further

100 basis-point cut in the amount of cash banks have to hold in deposits against

their loans.

     "The high RRR is an important obstacle for transmission of monetary policy

as it has locked in lenders' liquidity at a low rate and distorts market

prices," he said.

     There is still room for further RRR cuts to normalize monetary policy, so

long as the PBOC limits its provision of short-term funds via open market

operations including its market medium-term lending facility, he said.

     There is a danger PBOC easing could drag down money market rates, narrowing

the yield spread between China and U.S Treasuries, Guan said.

     "The narrower yields spread would continue to pressure the yuan exchange

rate against dollar," he said.

     RRR cuts, though, have not boosted lending as much as the PBOC had hoped,

particularly to smaller and private companies. The additional liquidity made

available could find its way into unwelcome places, Guan said, pointing to the

possibility that it could fuel asset price bubbles. Banks could also use cash

the PBOC would prefer them to lend to buy corporate bonds, further fuelling a

worrying build up of leverage, he said.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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