China Center Chart of the Week: SLF injections are preemptive, not stimulative – and perhaps a baby step toward price-based monetary policy

This China Center chart examines the overnight and 7-day interbank repurchase rates (repo rates) in China. These are the rates at which banks borrow and lend to one another, and the 7-day is widely considered to be the best overall gauge of liquidity in China’s banking system. Movements in the interbank rate thus reflect the central bank’s liquidity management orientation and can help shed light on the related issue of monetary policy stance.

Last week, local news reports in China indicated that the PBoC is set to issue 500 billion RMB to the five largest commercial banks (100 billion RMB each) through a facility called the Standing Lending Facility (SLF), causing market speculation that the move was in response to weak August data and is thus part of the central bank’s “targeted” monetary policy support program. Many have also argued that the move is equivalent to a temporary cut in the RRR of 0.5 percent. But such an interpretation misunderstands what the SLF is and how the PBoC uses it.