![]() With recent reform, the PBC worked to improve the LPR formation mechanism among commercial banks and to have the LPR play a guiding role in the formation of real interest rates so as to improve the market-based interest-rate formation and transmission mechanism, which smoothed the transmission of policy rates to market rates and promoted a reduction in the real interest rates for the financing of enterprises. Second, the PBC established a preliminary policy interest-rate system including short-term policy rate which is OMO rate, mid-term policy rate which is MLF rate, and interest rate corridor, the ceiling of the corridor is SLF rate, and the bottom of the corridor is excessive reserve rate. And besides, the PBC also adjusted the criteria for assessing inclusive Micro and Small Businesses (MSBs) loans to expand coverage of the preferential policy on targeted reserve requirement ratio cuts for inclusive financing. Second, for banks that operate and provide services to counties, when their local lending accounts for a certain proportion of the increment in their deposits, they will be eligible for a further RRR cut of 1 percentage point. First, first and second tranche banks that have met the evaluation criteria for the targeted RRR cuts for inclusive finance will be eligible for further RRR cuts of 0.5 percentage point or 1.5 percentage points. "Two additional preferential treatments" refer to two preferential policies based on the three-tranches. The third tranche applies to small banks, which include rural credit cooperatives, rural cooperative banks, village banks and rural commercial banks operating and providing services to counties. The second tranche, whose RRR is slightly lower, applies to medium-sized banks, including joint-stock commercial banks and city commercial banks. The first tranche applies to large banks to reflect the requirements to prevent systemic risks and maintain financial stability. "Three tranches" refer to three levels of the RRR based on the systemic importance, the institution type, and service positioning of the financial institutions. With recent reform, the PBC established a new RRR framework featuring "three tranches of reserve requirements and two additional preferential treatments" to guide small and medium-sized banks to provide services to local enterprises and to the real economy. Key features of the monetary policy implementation frameworkįirst, a series of monetary-policy instruments, including Open Market Operation (OMO), Required Reserve Ratio (RRR), Medium-term Lending Facility (MLF), and Standing Lending Facility (SLF) etc are employed to manage liquidity in the banking system. Article 3 of the Law of the People's Republic of China on the People's Bank of China establishes that "the objective of monetary policy is to maintain the stability of the value of the currency and thereby promote economic growth."Īrticle 2 of the Law of the People's Republic of China on the People's Bank of China establishes that "the People's Bank of China shall, under the leadership of the State Council, formulate and implement monetary policy"Īrticle 23 of the Law of the People's Republic of China on the People's Bank of China establishes that "to implement monetary policy, the People's Bank of China may use the following monetary policy instruments: (1) requiring banking financial institutions to place deposit reserves at a prescribed ratio (2) deciding on the benchmark interest rates of the central bank (3) providing discount services to banking financial institutions that have opened accounts in the People's Bank of China (4) providing loans to commercial banks (5) purchasing and selling central government bonds and other government securities, financial bonds, and foreign exchange on the open market and (6) other monetary policy instruments decided by the State Council".
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