PBoC: Three rate cuts, one adjustment - ING

Iris Pang, the economist for Greater China at ING, notes that the People's Bank of China (PBoC) has cut interest rates three times this month.

• "However, we should really see all these cuts as just one cut of five basis points. The policy implication is that the interest rate curve from the short rate to the five-year rate should reflect these cuts.
• The methodology by the PBoC to move almost the whole interest rate curve by cutting interest rates of various maturities means that the interest rate transmission mechanism in China does not function very well.
• We expect the PBoC to live with this until the MLF rate is truly market-based, at which point the PBoC can leave the MLF rate and the LPR to the market. By then, the policy interest rate will be the short-term interest rate alone.
• "Data-dependent" monetary policy is quite unusual in China because most of the time, the PBoC seems to have an interest rate path in mind for the year ahead. But the trade war has changed how the central bank projects its policy. 
• A positive outcome from the trade war would mean the central bank can stay put on monetary policy, but the reverse will mean it needs to loosen further. The trade war has also resulted in massive infrastructure investments, which should enter into the production stage from the investment stage in the coming months. This will also affect how the PBoC manages monetary policy.
• As such, we expect the central bank to be more data-dependent than in the past. 
• Aside from its interest rate policy, the PBoC also has a policy of managing liquidity. Cutting the reserve requirement ratio is a major tool here. Others include the injection or absorption of cash in the interbank market via the MLF and daily open market operations.
• After the RRR cut in September which injected CNY800 billion into banks, there were further targeted RRR cuts, which released CNY100 billion on 15 October and 15 November. Additionally, net liquidity injections between September and 20 November amounted to CNY55 billion. The total was an injection of CNY955 billion over just three months.
• This highlights that liquidity management is an important tool to guide interest rates lower."