Sep 08, 2021 05:04 AM

China’s Central Bank Says Liquidity Is Ample and Balanced

Chinese banks’ deposit rates declined after the PBOC allowed banks to set ceilings, prompting a drop in loan interest rates.
Chinese banks’ deposit rates declined after the PBOC allowed banks to set ceilings, prompting a drop in loan interest rates.

There is no large monetary base gap in China, and the supply and demand for liquidity will maintain balanced in the next months, a senior official at the central bank said.

The People’s Bank of China (PBOC) has adequate tools to smooth out periodic fluctuations in liquidity caused by factors such as fiscal revenue, expenditures and government bond issuance, Sun Guofeng, head of the PBOC’s monetary policy department said Tuesday at a State Council briefing. The PBOC is fully capable of maintaining reasonably abundant liquidity, the official said.

The central bank has used a combination of monetary policy tools, including cutting the reserve requirement ratio (RRR), relending, medium-term lending facilities (MLF) and open-market operations, to inject liquidity, Sun said.

With the acceleration of government special purpose bond issuance and 2.45 trillion yuan ($378.9 billion) of MLF due in the fourth quarter, market participants project a monetary base gap as wide as 1 trillion yuan in the final four months of this year, which may require another cut in reserve requirement ratios.

The PBOC in July cut the RRR for banks by 50 basis points, or half a percentage point, which is estimated to have released about 1 trillion yuan of long-term funds for banks to lend to businesses.

Financial institutions have used the long-term funds released by the RRR cut to repay some of the MLFs, and the liquidity needs have been fully met, Sun said.

Under current conditions, it may not take as much liquidity to keep money market rates stable, Sun said. The central bank has stabilized market expectations by improving the liquidity and market interest rate control framework, effectively reducing the demand for preventive liquidity by financial institutions, he said.

The market should judge the tightness of liquidity simply based on liquidity in the banking system or the RRR, Sun said. The most important indicator for judging liquidity is to observe market interest rates, especially the seven-day repurchase rate, he suggested.

This indicator shows that the money market is running smoothly, with no significant liquidity fluctuations at the end of the month or quarter, and the deviation from the seven-day reverse repo rate in the open market is at the lowest level for the same period in recent years. The average seven-day repurchase rate in August was 2.15%, five basis points below the seven-day reverse repo rate in the open market, which means they are very close, Sun said. A basis point is a hundredth of a percentage point.

China launched an interest rate overhaul June 21 to allow banks to set ceilings on deposit rates. In July, banks’ deposit rates declined, prompting a drop in loan rates.

“Our monetary policy has relatively large room,” PBOC Vice Governor Pan Gongsheng said at the briefing Tuesday. “This is the main difference between China’s monetary policy and that of the Federal Reserve and other major economies since the beginning of 2000.”

China will maintain prudent monetary policy and not resort to flood-like stimulus, Pan said.

Contact reporter Denise Jia ( and editor Bob Simison (

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