Reading PBoC signals takes ‘Mosaic approach’

In the lead up, authorities have been reining in debt risk and consistently pledging ‘prudent, neutral’ policy


BEIJING • China’s central bank could adjust monetary policy again in the coming months, in response to changes in the economy or the shifting agendas of top political leaders following the 19th Party Congress, according to Goldman Sachs Group Inc.

For hints on how monetary policy will evolve, investors should piece together a range of abstract and irregular signals ranging from interbank rates to quarterly reports, MK Tang, senior China economist at Goldman in Hong Kong, wrote in a note. Unlike global peers, the People’s Bank of China (PBoC) doesn’t make scheduled policy rate announcements, and speeches are relatively rare.

The reaction function, or how PBoC officials led by Zhou Xiaochuan set policy in response to economic data, may “potentially be re-calibrated after the upcoming party transition,” Tang said. That’s underscored by the central bank’s Sept 30 announcement of a targeted reserve requirement ratio (RRR) cut for banks to ensure credit reaches small businesses, Tang added.

President Xi Jinping will gather Communist Party officials for twice-a-decade leadership reshuffle starting next week that could replace about half of the top cadres. In the lead up, authorities have been reining in debt risk and consistently pledging “prudent and neutral” policy, while leaving the benchmark lending rate unchanged for almost two years.

“Understanding policy intention is not always an easy task in China though, given an absence of regular rate-setting meetings and limited explicit guidance from senior officials,” Tang wrote. “It does not mean that information is lacking, but it requires a mosaic approach that involves watching and analysing a broad spectrum of cues.”

Tang outlined five broad sets of signals for interpreting policy intent:

• The PBoC’s “official taxonomy”, such as calling for a prudent and neutral policystance, released quarterly and typically set at the year-end Central Economic Work Conference.

• The tone of irregular official comments, with rare deviations from the party line indicating a strong signal.

• Quantitative liquidity indicators, such open market operations or changes to the Medium-term Lending Facility targeted lending programme.

• Interbank rate spreads, which reflect financial leverage and influence the policy bias. The repo rate that covers only banks can reflect the policy stance more accurately than the general seven-day repo rate, and gravitates toward it over time, Tang said.

• High-level actions like changes in the benchmark rate or required bank reserves.

“These various sets of signals each offer a different perspective, and are best pieced together to provide a more comprehensive read of policy intent,” Tang said. “Most recently, the RRR news in isolation is a dovish hint”, but other indicators such as liquidity operations and signs of financial leverage “would be useful supplementary signals to watch”.