China's central bank engineered a quiet revolution in monetary policy last year, newly released data have shown, as authorities invented tools to grow the money supply in response to a dramatic fall in capital inflows.
For most of the past decade, the People's Bank of China's main challenge was to sterilize huge inflows of foreign exchange in order to prevent runaway money growth. Its task now is the opposite: find new ways to inject funds to fill the gap as huge inflows turn to moderate outflows.
The PBoC's latest monetary policy report shows that base money creation through central bank purchases of foreign exchange fell to Rmb640 billion last year, a decrease of Rmb2.1 trillion from 2013.
By contrast, monetary policy tools — including open market operations and other forms of lending by the PBoC to commercial banks — injected Rmb2 trillion in base money last year, compared with a Rmb100 billion drain in 2013.
"A change emerged in the base money supply channel," the PBoC said in typically understated language.
In a sign of the capital outflow with which authorities are grappling, the PBoC's foreign assets fell by Rmb155bn in the past six months, compared with a Rmb1.4tn increase in the same period of 2013, as investors swapped renminbi for foreign currency.
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In addition to market-driven outflows, the drop in foreign assets also reflects the PBoC's active intervention in the foreign exchange market aimed at limiting the fall in the renminbi. Such intervention also contracts the domestic money supply, as the central bank sucks renminbi out of the banking system and injects dollars.
Data on the PBoC's foreign assets broadly track more oft-cited figures on China's foreign exchange reserves, but the assets series is considered a better indicator of capital flow because it is not marked to market when exchange rates fluctuate.
The consequence of the shift from inflow to outflow is that liquidity injections that were once taken as a sign of easing now appear more akin to efforts to maintain the status quo.
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PBoC's move last week to cut the required reserve ratio on commercial banks is an example. Previously, such moves were taken as a sign of an easing bias. But the stock market — which normally jumps on signs of monetary loosening — actually fell the next day. Money market rates, which once tumbled in response to RRR cuts, have also barely budged.
"Rate cuts and reserve ratio cuts get a lot of attention and are welcomed by the market, but to understand if policy easing is really happening, you need to look at borrowing rates to the real economy," said Helen Qiao, chief greater China economist at Morgan Stanley.