China’s new monetary policy reality: The market starting to push PBOC - Natixis

Alicia Garcia Herrero, Research Analyst at Natixis, notes that since January 24th, a lot of attention has been diverted to the unexpected increase in several monetary policy instruments in China, which has led to the view that of a major change in PBoC’s policy stance.

Key Quotes

“Our view is that the PBoC would try to keep a relatively lax monetary environment in 2017 to support growth, which remains as China’s overarching objective.”

“Meanwhile, bank problems and, more importantly, still prevalent capital outflows, are eating into the liquidity injected by the PBoC, which has resulted in higher market rates since last November. The PBoC accommodation of such market situation is to continue but will be increasingly difficult. In other words, it will try to keep its (loose) monetary stance but at the same time being pushed to tighten by market forces. The PBoC chasing the market rather than the market chasing the PBoC only is a consequence of capital controls not being as effective as the central bank would wish. The impossible trinity is banging at the PBoC’s door.”