(Repeats story from late Wednesday with no changes)
* PBOC increasing flexibility and scope of its operations
* Greater use of market mechanisms instead of benchmark
* Expanded scope of its prudential tools to manage risk
* Aims to control cost of capital without shock to system
By Kevin Yao
BEIJING, April 12 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
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
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
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
"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)