Forward guidance and the PBOC

The People's Bank of China has been loosening monetary policy but you would not know it without a careful review of all the tools available to the central bank. The PBOC runs monetary policy through a set of strategies that has lowering interest rates as just one of the choice available. While most central banks employ raising and lowering rates as the primary tool for policy, the PBOC seems to choose unconventional tools first. The central bank may not have gotten the global memo on forward guidance as an important tool. Communication is just not that important for the PBOC. This is at odds with the behavior or standards of most other central banks.

In the last six months, we have seen significant increases in indirect lending facilities through the China Development Bank, lowering of the deposit ratios, re-loan rates, deposit, and lending rates. All these changes are attempting to boost growth without having to directly explain that Chinese growth needs boosting.

This lack of transparency will lead to more speculative behavior by investor and also the chance for major mistakes. The large stock market move is in part a direct response to this monetary stimulus. Growth is slowing but monetary stimulus is increasing so we are seeing asset price inflation.  Without guidance, many investors are thinking these increases in lending facilities will continue along with lower rates.

In fairness, even central banks who espouse forward guidance and transparency have not always done a good job; however, the risk of miscommunication is higher when communication is in short supply.