China central bank changes market liquidity rules

China-Chinese-Yuan-Renminbi-Currency-Asia-700x450.jpgThe People’s Bank of China is moving permanently to daily open-market operations to make its liquidity management “better targeted and more efficient”.

The PBoC previously conducted open market operations twice a week on Tuesdays and Thursdays.

On 28 January the central bank said it would temporarily undertake open market operations every working day until 19 February to ensure adequate liquidity in the run-up to the Chinese New Year holiday. That change will now be permanent.

AJ Bell investment director Russ Mould says the central bank’s announcement of daily market operations is the latest policy initiative as the country tries to square the growth-currency-interest rates circle.

He says: “[The move] may mean a rate cut is less likely in the short term and that may help quell volatility in the currency.”

In October 2015, the PBoC cut its interest rates for the sixth time in a row since November 2014.

The country’s benchmark one-year lending rate was cut by 0.25 percentage points to 4.35 per cent, from 4.6 per cent in August, while the one-year deposit rate dropped to 1.5 per cent from 1.75 per cent.

However, a big currency devaluation seems unlikely for the moment, says Mould.

“It is unlikely China will want to see huge moves in the renminbi ahead of September’s G20 meeting in Hangzhou, as any marked devaluation could lead to some spiky exchanges with export rivals.”

He adds: “China is still a big importer of goods and materials, so a devaluation would hardly help here, while if the authorities are planning a devaluation, they are going about it in a strange way, by frequently intervening to support the remnibi.

“Nevertheless, the markets remain wary of big moves in the currency, as any lurch down would revive fears that China is about to export deflation to the rest of the world.”

Zhou Xiaochuan, the PBoC’s governor, said there is no need for further depreciation of the remnibi and that the direction of the currency exchange rate regime reform remains “unchanged”.

In an interview with Beijing-based Caixin Weekly Xiaochuan said: “Some people are concerned that China will allow the RMB to depreciate in a bid to boost exports and GDP growth, which might intensify the so-called ‘currency war’.

“If one has a closer look at China’s current account balance, he will find that in 2015 goods trade surplus was close to $600bn, and net exports’ contribution to GDP was fairly high; therefore, there is not a motivation for depreciation to boost net exports.”