June 18, 2014 / 3:51 AM / 5 years ago

China central bank plans new monetary tool to guide medium-term interest rates: paper

A Chinese national flag flutters outside the headquarters of the People's Bank of China, the Chinese central bank, in Beijing, April 3, 2014. REUTERS/Petar Kujundzic

SHANGHAI (Reuters) - China’s central bank is planning to create a new monetary tool that will help adjust supply to the country’s monetary base and consequently help guide medium-term interest rates, the semi-official China Business News said on Wednesday without citing sources.

The new tool is a type of supplementary lending instrument backed by collateral. Temporarily called “Pledged Supplementary Lending” (PSL), the tool is similar to the central bank’s existing re-lending monetary tool, the newspaper said.

“The central bank wants to use the interest rates on the PSL to create medium-term (benchmark) interest rates,” the newspaper said. These would be interest rates of three months to a year.

The People’s Bank of China did not immediately respond to requests for comment.

PSLs, if deployed as China Business News described, would supplement the central bank’s existing set of targeted tools for managing interest rates and liquidity, helping its ongoing campaign to rely more on precision firepower in its money markets to ensure capital is routed to productive uses, as opposed to opening the capital floodgate by reducing system-wide bank reserve requirement ratios (RRR) or reducing benchmark long-term interest rates.

Such major policy moves risk provoking destabilizing inflation cycles, industrial over-capacity and speculative asset price bubbles.

The PBOC is able to manage short-term rates in the interbank market because it can easily test demand using bond repurchase agreements (repos), which have tenors ranging from one day to 91 days. It has also deployed short-term lending facilities (SLFs) and other supplementary mechanisms, but at present its ability to test commercial bank demand for longer-term capital is more limited.

At the same time, PSLs could also serve a policy purpose, helping guide rates for lending to investment projects that are guaranteed by the government, such as infrastructure and other socially beneficial uses.

Reporting by Lu Jianxin, Adam Jourdan and Koh Guiqing in BEIJING; Writing by Pete Sweeney; Editing by Jacqueline Wong

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