In face of growing uncertainties both domestically and externally, China's monetary policy is expected to bear the brunt of massive currency outflows, speculative bets on currency depreciation, risks of an economic hard-landing, worrying corporate debt and shadow banking, a hostile international trading environment, and the imperative of a reasonably high growth rate to realize the national goal of becoming a "moderately well-off society" by 2020.
A BBVA's research note of 2 March 2017 reports on the introduction by the People's Bank of China (China's central bank) of a new "Corridor System" of monetary management, employing a variety of tools to achieve prudence with flexibility.
According to the note -
"Under this system, the new policy target is the pledged 7-day inter-bank market rate while the rates of Standing Lending Facility (SLF) and excessive deposit reserves constitute the upper and lower bounds of the “corridor” respectively. The central bank will align the policy rate target with their desired levels via open market operation (OMO).
Such a “corridor” system is also characterized by the plurality of policy tools. In practice, the central bank can conduct its monetary policy via (i) adjusting the size of OMO, (ii) moving the SLF and MLF rates, or (iii) deliberately selecting the tenor of the SLF and MLF offered to banks.
Even with the new framework and policy tools in place, we don’t expect the traditional tools of benchmark lending/deposit rates and Required Reserve Ratio (RRR) to be abandoned soon. They are likely to become the heavy weapons in the PBoC’s arsenal, which are to be tapped when the authorities find it necessary to give a strong policy signal to the market.
The stance of monetary policy this year is likely to be prudent in real sense. As the economy is subject to enormous uncertainties externally and domestically, the central bank has to walk a fine line between containing financial risks on the one hand, and averting a sharp growth deceleration on the other."
