Caixin Explains: Why and How China’s Overhauling Monetary Policy (Part 2)

In Part 2 of this three-part series, Caixin explains why the People’s Bank of China is changing its interest-rate system

China’s central bank is starting a major overhaul of how it manages monetary policy as the country adapts to slowing growth and the changing structure of the economy. 

The new framework, which brings the People’s Bank of China (PBOC) more in line with its peers in other major economies, including the U.S. and European Union, was flagged by Governor Pan Gongsheng in a speech in June. He also pledged to improve communication with the markets to enhance transparency and guide expectations about the direction of policy.

Pan outlined three key changes — a further shift away from quantitative targets such as total social financing and M2 money supply, with a greater focus on interest rates; refining the interest rate system that currently has many policy rates, which may lead to the adoption of just one main policy rate; and trading government bonds in the secondary market to manage liquidity.

In part two of this three-part series on the PBOC’s proposed new framework, Caixin explains why the central bank is changing its interest rate system. In part three, we will look at the role trading government bonds in the secondary market will play in managing liquidity and monetary policy. To read part one, which explains the reasons behind the overhaul of monetary policy, click here.

What’s wrong with the interest rate management system?