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Monetary Policy and Liquidity Dynamics in China: Investigating the Reasons for the Ineffectiveness of Central Bank Open Market Operations in Alleviating Banking Funding Constraints

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DOI: 10.23977/ferm.2023.061011 | Downloads: 21 | Views: 482

Author(s)

Guyu Liu 1

Affiliation(s)

1 Caixin Insight CEBM (Shanghai) Institute, Jialuo Road, Jiading District, Shanghai, China

Corresponding Author

Guyu Liu

ABSTRACT

In August 2023, the People's Bank of China (PBOC) implemented a series of monetary policy measures, including interest rate cuts and expanded reverse repo operations, to address economic challenges. These actions were driven by factors such as a sluggish intrinsic economic recovery, weak financing demand in the real economy, and concerns over credit risks associated with major property developers. Ensuring the stability of commercial banks' profitability was also deemed crucial for overall financial system stability. However, despite these measures, interbank market rates displayed an atypical and sustained upward trend, tightening liquidity conditions. This phenomenon appears to be linked to government debt issuance. Looking ahead to September, the paper anticipates potential bank credit expansion, especially with relaxed mortgage lending policies in first-tier cities and accelerated special bond issuance. While short-term liquidity conditions may remain tight, an anticipated reserve requirement ratio cut is expected to restore liquidity and support debt refinancing needs. This study underscores the complex interplay of monetary policies and market dynamics in China's financial landscape.

KEYWORDS

Monetary policy measures, Interbank market rates, Government debt issuance

CITE THIS PAPER

Guyu Liu, Monetary Policy and Liquidity Dynamics in China: Investigating the Reasons for the Ineffectiveness of Central Bank Open Market Operations in Alleviating Banking Funding Constraints. Financial Engineering and Risk Management (2023) Vol. 6: 82-86. DOI: http://dx.doi.org/10.23977/ferm.2023.061011.

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