Central Banks

PBOC: Our big easing nothing like ECB's, Fed's QE

The People's Bank Of China (PBOC) headquarters stand at night in the financial district of Beijing, China.
Tomohiro Ohsumi | Bloomberg via Getty Images

China's central bank has insisted its latest differed from the quantitative easing (QE) strategy pursued by foreign central banks, according to a statement released early Monday, adding that the cut in interest rates and reserve requirement ratios were "conventional and normal monetary policy measures."

On Friday the People's Bank of China (PBOC) announced a quarter-point cut in benchmark interest rates, as well as a reduction in the amount of deposits banks were required to hold in reserve by 50 basis points, a week after official data showed the third-quarter growth of the world's second-biggest economy was at its slowest since the global financial crisis.

Friday's moves marked the sixth interest-rate cut since November 2014 and the fourth reserve requirements reduction, as authorities attempt to resuscitate a faltering economy.

Explaining the move, the PBOC wrote on its website on Monday that the late-evening moves on Friday were "reasonable and fully expected" given China's feeble consumer prices and declining funds outstanding for foreign exchange held by Chinese financial institutions.

"The cooling inflation in September means that an appropriate reduction in the nominal interest rate is needed to allow real interest rate to return to a reasonable level, allow social financing costs to fall further and amplify the financial support for the economy," the PBOC said in the statement.

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Last month, the consumer price index (CPI) increased 1.6 percent from a year earlier, against forecasts of a 1.8 percent rise and following August's 2 percent gain. On the other hand, the producer price index (PPI) fell 5.9 percent in September, chalking up its 43rd straight month of declines.

"In the past few months, the total outstanding funds for foreign exchange have seen a certain level of decline. Even though the foreign exchange market has been relatively stable, uncertainties remain ... Hence the reduction in banks' reserve requirement will add more liquidity to the banking system," said the central bank, adding that the RRR cut would not expand its balance sheet.

As such, the latest easing measures differ significantly from the QE measures implemented by other central banks, which essentially mean an expansion of a central bank's balance sheet by purchasing a certain quantity of targeted assets such as bonds.

The PBOC said China did not face the restriction of "zero interest rates" as faced by, say, the European Central Bank, because its nominal interest rates remained above zero, while its deposit reserve ratio was also still relatively high. As such, China has the flexibility to use of conventional monetary policies, the statement said.

Behind the China rate cut

Along with the easing moves, the central bank took what it called a "core reform" that moved it closer to liberalizing its financial system, by abolishing the official cap on deposit rates.

"The interest rate market is a core reform in the country's financial sector. The removal of a ceiling on deposit rates for commercial banks and rural cooperatives, signify a crucial step forward in terms of reforms and indicate that the interest rate market has entered a new phase," the PBOC wrote.

"This fully represents the country's confidence and determination in pushing through reforms."