BEIJING China's central bank has been quietly boosting its policy independence and regulatory reach as it seeks to contain risks to the financial system, policy insiders said, to help ensure stability ahead of a five-yearly leadership team transition this year.
By greater use of market mechanisms to adjust interest rates instead of changing the official benchmark rates, which need political approval, the People's Bank of China has assumed more targeted, timely and effective control of its principal policy objective - to calibrate the cost of capital in the economy.
And by broadening the scope of the tools it uses to assess and limit the accumulation of risky assets in the banking system, it has expanded its oversight powers without getting embroiled in the kind of bureaucratic infighting that has beset plans to create a financial super-regulator.
That has given the PBOC room to manoeuvre at a time when it needs to contain speculative bubbles and risky lending while avoiding abrupt tightening measures that could hurt the economy.
"China faces big systemic risks, and 2017 is a crucial year for controlling such risks," said a policy adviser.
"The central bank has been expanding its regulatory functions and it's taking an over-riding role (on risk controls)."
The PBOC is likely to guide market interest rates higher using reverse repurchase agreements (repos), and its standing lending facility (SLF) and medium-term lending facility (MLF), while keeping benchmark interest rates steady, policy advisers said. That will allow it to fine-tune borrowing costs without using the blunt instrument of benchmark rates, which could hurt the heavily indebted corporate sector.
"China's economic fundamentals are slowly improving, but there could be problems if we tighten policy too quickly," a second policy adviser said.
The central bank raised short-term interest rates on March 16 in what economists said was a bid to stave off capital outflows and keep the yuan currency stable after the Federal Reserve had raised U.S. rates.
That followed increases in its repo rates and the SLF on Feb. 3, and a rise in rates on the MLF in late January.
Its recent changes to interest rates have been announced during market trading, including just hours after the Fed raised rates.
In contrast, previous changes in official benchmark lending and deposit rates, which needed cabinet approval, often came in the evening or at weekends.
China's central bank still has much less autonomy than Western peers, so it doesn't have the final word on adjusting official interest rates or the value of the yuan. The basic course of monetary and currency policy is set by the cabinet or by the Communist Party's ruling Politburo.
The PBOC did not return requests for comment.
Under long-serving Governor Zhou Xiaochuan, the PBOC has been a driver of the reform agenda, with a long-term goal to make banks' borrowing costs more market driven to improve resource allocation and wean the economy off its reliance on state-led investment.
Reuters reported in 2015 that China was considering bringing together its banking, insurance and securities regulators into a single super-commission, following a stock market crash that was blamed in part on poor inter-agency coordination.
But policymakers and the different bureaucracies have yet to reach a consensus on how to proceed with a regulatory overhaul.
"Such an overhaul is unlikely to happen soon because it concerns interests, personnel arrangements and relationships between different departments," said another policy adviser.
Chen Yulu, a central bank vice-governor, told a forum last month that the PBOC is trying to establish a "twin-pillar framework of monetary policy plus macro-prudential policy".
The central bank's macro-prudential assessment (MPA) is a formal evaluation that assigns a score to each bank based on parameters believed to include asset quality, capital adequacy, the proportion of liquid assets and stability of funding.
The MPA was launched last year and, while not publicly disclosed, the PBOC has widened the risk-assessment framework to include off-balance-sheet wealth management products (WMPs) in the first-quarter report, sources at commercial banks said, in line with the central bank's announcement in December.
"To control financial risks, we cannot have a fragmented regulatory system under which different agencies do their own things," said a source at a major commercial bank.
"Letting the central bank take the lead is most suitable, given that it's tasked to oversee money supply, liquidity, and control systemic risks."
WMPs, often linked to shadow banking, have seen explosive growth in recent years, with funds channelled into stock and bond markets.
"It's necessary for the PBOC to take on more regulatory functions under its MPA because there are many hidden risks that could pose a threat to China's financial stability," said the second policy adviser.
The official Shanghai Securities News reported last month that mortgages could also be included in the MPA this year. Home mortgages accounted for nearly 40 percent of China's record new loans of 12.65 trillion yuan ($1.8 trillion) last year.
The Organisation for Economic Co-operation and Development (OECD) says China's total private and public debt has grown to more than 250 percent of GDP, up from 150 percent before the global financial crisis.
($1 = 6.8979 Chinese yuan renminbi)
(Reporting by Kevin Yao; Editing by Will Waterman)