PBC has conventional tools in monetary kit
China's central bank on Monday emphasized that its latest cuts are not an attempt at quantitative easing and will not involve massive spending by the central bank.
The latest cuts on interest rates and reserve requirement ratio (RRR) are a "reasonable and necessary" move in consideration of China's commodity price and liquidity changes, which is "different from the quantitative easing (QE) policies adopted in other countries," the People's Bank of China (PBC) said on Monday.
According to a statement released on its website on Monday, the PBC said that its latest cuts were "conventional and normal monetary policy measures."
Countries like the US, unable to lower interest rates below zero, have attempted to buy back treasuries from banks in an effort to increase the money supply, a strategy called quantitative easing. The increased liquidity in the market can lead to lower interest rates which can provide better financing conditions for enterprises, stimulating the whole economy.
The PBC noted in its statement that countries using quantitative easing have to directly expand their central bank's balance sheet by buying a certain quantity of targeted assets such as bonds. China, however, has not yet faced the restriction of zero interest rates. Its nominal interest rate is still above zero, and its reserve ratio is still high. Therefore, there is still room for China to use interest rates and reserve rate tools which will not require the country to indirectly "print money" or expand its balance sheet, the PBC said.
"The central bank's clarification can help to avoid its latest policy being misread as quantitative easing," Wang Tao, chief China economist with UBS, told the Global Times on Monday.
Wang noted that the PBC's latest move is not comparable with the "quantitative easing" in Western countries. "The PBC's latest move has a clear target of broad money growth," Wang said.
Late on Friday, the PBC announced that it was cutting the benchmark deposit and lending rates by 25 basis points, the sixth cut since November 2014.
The PBC explained that the cuts on interest rates and RRR were "reasonable and necessary policy adjustments based on the changes in the economic price and liquidity situation."
The PBC said that the cuts on nominal interest rates can help to maintain reasonable real interest rates to reduce the cost of financing and strengthen financial support for the real economy.
The RRR was cut to ensure proper and sufficient liquidity in the banking system, the statement said.
The PBC said that banking liquidity was reduced because a high amount of taxes were turned over to the State treasury in October. The PBC also said that the future possible change in funds outstanding for foreign exchange would negatively influence banking liquidity.
Xu also stressed that only by launching follow-up supporting policies as soon as possible can the government realize its aim of stabilizing economic growth - the intention for its latest cuts in interest rates and RRR.
The PBC also provided an explanation for its decision to remove the cap on bank deposit rates, saying this can help to optimize the allocation of resources, promote the transformation and development of financial institutions and help the transformation of monetary policy control.
The PBC said that interest rate liberalization is a core reform in China's financial sector. It said the deregulation of interest rates is a milestone in China's interest rate liberalization.
"We now expect the PBC to cut rates one more time this year, likely in December, and again in early 2016," Wang said. "We expect another 50-100 basis point RRR cut by end 2015, and about 300 basic point cut by end 2016."
As for concerns that the yuan may continue to depreciate with interest rate and RRR cuts, Xu said the yuan exchange rate will remain stable in the future.
