China's Central Bank Could Embrace Federal Reserve Model In A Major Reform Under Governor Pan Gongsheng

The People’s Bank of China is contemplating a major overhaul of its monetary policy, aligning it more closely with the U.S. Federal Reserve’s model.

What Happened: PBOC Governor Pan Gongsheng has proposed a series of changes that would bring the Chinese central bank more in line with its global counterparts, particularly the Federal Reserve. These changes include the adoption of a single key short-term policy rate and the introduction of government bond trading to manage liquidity, reported Bloomberg on Sunday.

The proposed changes would not imply a complete alignment with western peers, as China remains opposed to quantitative easing and the concept of independence from the government. "Including government bond buying and selling into the monetary policy toolbox doesn't mean we'll do quantitative easing," said Pan.

However, these changes would mark a significant shift in China’s monetary policy, which market forces have largely controlled since the 1990s.

The timeline for these reforms remains uncertain, with Pan noting that the central bank is still studying the measures. Analysts suggest that bond trading could commence after a key Communist Party meeting on reform later in July, according to the report.

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Why It Matters: The current system of setting monetary policy in China involves the use of multiple rates, leading to “messy policy signals,” according to Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered Plc. This has resulted in significant deviations between market interest rates and policy rates, hampering the PBOC’s ability to inject cash into the economy.

The proposed shift to a single policy rate, possibly the seven-day reverse repo rate, would bring China closer to the model used by other major central banks, such as the Federal Reserve. Additionally, the introduction of government bond trading would provide the PBOC with a more effective tool for managing liquidity and supporting the economy.

However, Governor Pan has made it clear that these changes do not signify a move towards quantitative easing. The proposed reforms are still under study, and the timeline for their implementation remains uncertain.

The proposed reforms could have a significant impact on China’s economy, particularly in the current context of global inflation and interest rate changes. Economists have endorsed a potential rate cut by the Federal Reserve, following a significant drop in the Personal Consumption Expenditure price index, which is seen as a key measure of inflation.

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This story was generated using Benzinga Neuro and edited by Kaustubh Bagalkote