The Real Reason Behind China’s Latest ‘Stimulus’

A decision by the People’s Bank of China (PBoC) to lower short-term borrowing costs for banks is not the standard pick-me-up aimed at a weakening economy.

Instead, the latest step by the PBoC is an experiment towards finding alternatives to benchmark interest rates whose efficacy has been blunted in recent years by the surge in the shadow banking system as well as removal of limits that tied commercial bank rates to official policy rates, economists say.

Late on Thursday, the central bank reduced its Standing Lending Facility (SLF) interest rates, yet another policy tool to inject cash into banks, with the seven-day rate cut to 3.25 percent and the overnight rate to 2.75 percent from 5.5 percent and 4.5 percent, respectively.

Typically, Chinese monetary stimulus relies on interest rate cuts or reductions in bank reserve requirements, with the lesser-known SLF only being used in anticipation of periods of tight liquidity, such as holidays. The facility hasn’t been used since March.

Thursday’s departure from traditional policy tools suggests that the central bank wasn’t necessarily trying to boost economic growth, unlike previous easing episodes.

Thursday’s cuts were to “discover the function of the Standard Lending Facility as the ceiling of the interest rate corridor,” according to the PBoC’s statement.
Global central banks use the interest corridor system to guide market interest rates towards main policy rates. When monetary conditions are tight, short-term money market rates move towards the upper end of the corridor as commercial lenders borrow from the central bank. Conversely, when financial markets are awash with cash, the lower end of the corridor ends up guiding policy.
For Beijing, a rate corridor is especially crucial as the world’s second-largest economy seeks to transition from a planned financial ecosystem to one that is more market-based.


Craig Erlam
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the BBC and The Telegraph, and he also appears regularly as a guest commentator on Bloomberg TV, CNBC, FOX Business and BNN. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.