BOFIT Viikkokatsaus / BOFIT Weekly Review 2015/27

​Last Saturday (June 27), the People’s Bank of China announced it was lowering reference rates by a quarter of a percentage point. The one-year loan rate now stands at 4.9 % and the one-year deposit rate at 2.0 %. The PBoC also lowered the deposit reserve requirements for most banks by a half percentage point. Bank reserve requirements, however, remain high, averaging 14.5–18.5 % of bank deposits and tying up considerable lending potential.

Simultaneous declines in reference rates and reserve requirements are rare. The last time such an event occurred in China was during the international financial crisis in 2008. The PBoC gives no justification for its decisions, causing speculations on what triggered the policy shift. Chinese officials are clearly concerned about the economic slowdown. The timing might point to the latest round of monetary easing being a response to increased uncertainty after the plunge in share prices. It might also be that the stock market drop created an opportunity for relaxing the monetary policy stance without having to worry that further easing might fuel borrowing and add to a stock market bubble.

In addition to the lack of a well-articulated policy, the opacity of Chinese monetary decision-making is increased by its unfinished nature. In principle, interest rates on bank loans to the general public have been freed and flexibility in setting deposit interest rates increased to such an extent that it is hard to determine what the current role of reference credit rates is. There is still no definitive steering rate for financial markets, however. The central bank also steers funding directly to strategic sectors, but the rules of granting of loans and methods for calculating reserve requirements are less than transparent. This time funding of farmers or small and medium-sized firms was set as a perquisite for a reserve requirement decrease, but the actual definition for such criterion remains unclear.

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