PBOC to use policy tools, including RRR

[BEIJING] The People's Bank of China (PBOC) will use its policy toolbox flexibly as it aims to ensure sufficient liquidity in the economy, a senior central bank official said, adding hundreds of billions of yuan will be earmarked for 2 new structural lending programmes.

"Downward pressure on the economy has increased currently," Sun Guofeng, head of the monetary policy department, said at a briefing on Thursday (Apr 14). "We will use monetary policy tools including reserve requirement ratio reduction (RRR) at the proper time" and keep liquidity "reasonably ample," he said, referring to the amount of cash banks must keep in reserve.

Sun's comments came a day after the State Council, China's cabinet, pledged to cut the RRR when needed and give greater financial support for industries and small firms hit hard by the pandemic. Covid controls across China, including an extended lockdown of Shanghai, have disrupted production and supply chains, while exacerbating pressure on already-weak consumer spending. Coupled with a persistent slump in the property market, it is becoming increasingly challenging for the government to achieve its target of around 5.5 per cent growth this year.

The PBOC is expected to cut a key policy interest rate - the rate on the 1-year medium-term lending facility - for the second time this year on Friday, and reduce banks' reserve requirement ratio within days to shore up the economy hit by Covid lockdowns.

Sun said the central bank will speed up the creation of 2 new relending programmes that provide funding to banks for lending on to technology businesses and the elderly care sector. The PBOC is seeking to "make good use" of both structural and aggregate policies, he said.

A total of 200 billion yuan (S$42.5 billion) in the tech relending programme will be available at a rate of 1.75 per cent, Sun noted. The funds will be relent to cover 60 per cent of the principal of loans with at least 6-month maturity that 21 national lenders would have granted to high-tech, innovative and leading manufacturing firms, he said.

The PBOC will also provide 40 billion yuan in quota for the relending programme to encourage credit for elderly care institutions, which will be carried out on a trial basis in the 5 provinces of Zhejiang, Jiangsu, Henan, Hebei and Jiangxi, Sun said. The cost of the loans will also be set at 1.75 per cent, he added, compared with the 2.85 per cent rate on the 1-year medium-term lending facility.

Sun Tianqi, head of the PBOC's financial stability bureau, said at the same briefing that the newly created financial stability fund will be used to replenish shortages in dealing with financial risks. The fund was first mentioned by Premier Li Keqiang last month. The PBOC started to ease monetary policy from late 2021 to counter the economic headwinds, while other major central banks including the Federal Reserve have hiked interest rates to contain runaway inflation.

The policy divergence wiped out China's yield premium over US Treasuries, adding to capital outflow pressures and threatening the Chinese currency. Sun Guofeng said China will focus on domestic conditions while setting the pace and magnitude of its monetary policy, closely monitor changes in the overseas environment and handle any "external shocks" accordingly. BLOOMBERG