Factbox: The Policy Arsenal of China’s Central Bank by Reuters

BEIJING (Reuters) – The People’s Bank of China (PBOC) is working to establish a more market-oriented interest rate framework while shifting away from quantitative policy measures in order to reduce the economy’s reliance on state-controlled bank lending.

Here’s a summary of the PBOC’s key interest rates and policy tools:

INTEREST RATES

• Reverse Repo Rates: These are the rates at which the PBOC buys government bonds from commercial banks, with an agreement to sell them back later. This mechanism provides banks with short-term liquidity. On July 22, the PBOC lowered the seven-day reverse repo rate by 10 basis points (bps) to 1.7%, maintaining this level since then. This rate has become the PBOC’s primary policy rate, with an interest rate corridor using temporary overnight repos and reverse repos that helps guide interbank rates around the benchmark.

• Loan Prime Rates (LPR): Determined by quotes from 20 commercial banks, these rates serve as the benchmark for lending. The PBOC aims to enhance the LPR’s accuracy in reflecting actual borrowing costs. On July 22, the PBOC reduced the one-year LPR, which is tied to regular consumer loans, by 10 bps to 3.35%, and decreased the five-year rate, associated with mortgages, by the same amount to 3.85%.

• Medium-Term Lending Facility (MLF) Rate: Previously the main policy rate, this is the rate at which banks can borrow from the PBOC for a one-year term. Currently, the one-year MLF rate is set at 2.3%. In June, the total MLF funding outstanding was approximately 7.07 trillion yuan ($994.6 billion), which represents about 5.6% of GDP.

• Standing Loan Facility (SLF) Rate: This rate applies to short-term loans granted to commercial banks and is currently at 2.7%. The usage of the SLF is relatively low.

• Interest Rate on Excess Reserves: Banks earn this rate for depositing surplus cash with the central bank, which is currently set at 0.35%.

QUANTITATIVE TOOLS

• Reserve Requirement Ratio (RRR): This reflects the proportion of cash that banks are required to hold as reserves with the central bank. The PBOC has reduced the weighted average RRR from nearly 15% in 2018 to about 7%, injecting more than 12 trillion yuan into the economy.

• Open Market Operations (OMO): The PBOC primarily employs OMO through short-term repurchase agreements and reverse repos to manage market liquidity.

• Structural Tools: Recently, the PBOC has broadened its array of structural policy tools, which include relending facilities and other low-cost loans aimed at supporting key sectors such as technological innovation, carbon reduction, and affordable housing. For instance, the Pledged Supplementary Lending (PSL) facility, initiated in 2014, offers long-term funding for government infrastructure and urban redevelopment, thereby supporting the property market.

In May, the PBOC introduced a 300 billion yuan relending program designed to enable up to 500 billion yuan in financing for state-owned enterprises to purchase vacant apartments and convert them into affordable housing.

As of the end of June, outstanding balances for structural monetary policy tools totaled 7.03 trillion yuan, including 2.82 trillion through the PSL.