BOFIT Viikkokatsaus / BOFIT Weekly Review 2015/17
In the absence of a functional interest-rate system, the RRR is the central bank’s primary instrument for regulating bank lending. Prior to 2015, the RRR had been unchanged for nearly three years, but this year it has been lowered twice for a total of 1.5 percentage points. The PBoC over the last six months has also twice lowered reference rates for loans and deposits. The PBoC also has lowered interest rates to banks on short-term (reverse repo) credits, with the result that short-term rates on the interbank market fell substantially in March. The PBoC has also granted banks short- and medium-term credit through other financing vehicles (SLF, MLF).
With the roles of various monetary instruments and their impacts unclear, China’s current monetary policy is hard to discern. The country is shifting, however, to interest-rate-based monetary policy. A prerequisite is the upcoming rollout of a deposit insurance scheme. The facts that banks will need to pay deposit insurance premiums and follow interest-rate-based monetary policy may also justify lower RRRs.