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The People’s Bank of China (PBOC) is the central bank of the People’s Republic of China. Like other central banks, the PBOC has the dual mandate of fostering financial stability and enhancing economic prosperity in China.
The bank has undergone a series of reforms and now enjoys a great deal of autonomy by Chinese standards.
Still, it remains one of the 25 cabinet-level state departments that constitute the State Council. Nonetheless, the PBOC is one of the most powerful central banks in the world, and it boasts the largest Forex reserves that tops $3 trillion.
Furthermore, the PBOC is known to implement unconventional monetary policy tools that have provided localised solutions for economic prosperity in the Republic of China.
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History of the People’s Bank of China
The PBOC was founded on December 1st, 1948 following the merger of 3 major banks: Huabei Bank, Beihai Bank and Xibei Farmer Bank.
This happened after the Chinese Communist Party took the reins of power, and the People’s Republic of China was created. The PBOC served as the only bank in the country until 1978, providing both central banking and commercial banking services during China’s famed planned economy period.
During that period, all other banks acted as non-deposit taking subsidiaries of the PBOC. Economic reforms performed by the Chinese State Council in 1978 resulted in the PBOC being split into four separate, but state-owned banks.
In 1982, the State Council announced that the PBOC would serve as China’s central bank. It was not until 1995 that PBOC’s status as the country’s central bank was anchored in law.
Major reforms continued before the turn of the millennium, and in 2003, PBOC achieved greater autonomy and assumed overall responsibility for financial stability and economic prosperity for the People’s Republic of China.
The PBOC is headquartered in Beijing, and multiple offices throughout China are not subject to local administrative jurisdictions.
The bank is headed by a Governor and five deputies. The Governor assumes overall responsibility for the operations of the PBOC, with the deputies expected to provide assistance.
Functions and Roles of the PBOC
The PBOC has over 18 departments that work to perform a wide scope of roles and functions that include:
- Draft and implement monetary and macro-credit guidance policies.
- Spearhead financial sector reform and the development of strategic plans for the financial sector.
- Draft, improve and implement relevant laws and regulations that help in performing its central banking functions.
- Issue and manage the circulation of the Chinese currency, Renminbi (RMB).
- Organise and formulate plans for the modernisation and digitisation of the Chinese financial sector.
- Gather relevant data for macro-economic analysis and forecasting, as well as disseminate to the public all useful information.
- Assume responsibility as the lender of last resort for financial institutions when such liquidity resolves any major financial risk.
- Supervise and manage the interbank lending market as well as all derivative transactions in all financial markets.
- Develop and implement the Yuan exchange rate; as well as monitor and track cross-border capital flows.
- Hold, manage and operate the state’s Forex and Gold reserves.
- Manage the credit sector while taking full responsibility for maintaining a functioning social credit system.
- Ensure a functioning national payments system.
- Represent the People’s Republic of China in international financial activities in the capacity of a central bank.
PBOC Unconventional Monetary Policy Tools
Most central banks utilise conventional monetary policy tools, such as open market operation and changing interest rates, to manage or stimulate their underlying economies.
But the PBOC has often implemented unconventional, but targeted monetary policy tools that have helped it achieve its objectives. They include:
Required Reserve Ratio (RRR)
The PBOC has routinely applied targeted RRR cuts for banks and financial institutions that lend to specific groups of the economy, such as SMEs (small and medium-sized enterprises) and Agriculture.
Pledged Supplementary Lending (PSL)
The PSL is a lending facility that allows the PBOC to lend to banks at favourable, flexible rates. The banks can then lend to targeted institutions or fund projects of state interest.
Loan to Deposit Ratio (LDR)
The PBOC redefined its LDR calculation, omitting determinants such as loans financed by the central bank. This automatically increases funds available for banks’ loan books.
PBOC in Fundamental Analysis
China is a major player in the global financial markets, which makes the PBOC particularly influential. To start with, the PBOC holds over $3 trillion in Forex reserves, the largest holding in the world.
Whenever the PBOC announces an increase or decrease in those reserves, the pricing of underlying assets is impacted.
For instance, if the PBOC decides to liquidate US treasuries, the value of those treasuries, as well as that of the US dollar, will usually drop.
The PBOC is also an aggressive market intervener and usually implements big cuts or hikes when the Chinese economy needs stimulation or cooling.
Previously, the PBOC based their rate system on Abacus, which meant that rates were set on numbers divisible by 9 (such as 0.27%). But this was ditched for the standard system where rates are divisible by 25 (such as 0.50%).
Chinese rate hikes or cuts do not affect just the Renminbi value. In Forex trading, they massively impact on the AUD (Australian dollar), which is one of the major currencies.
This is because Australia and China have deep trade ties. As such, a PBOC rate hike will likely be bullish for the AUD, whereas a rate cut will be bearish for the AUD.
Disclaimer – While due diligence, care and research have been undertaken to compile the above content, it remains an informational and educational piece only. None of the content provided constitutes any form of trade or investment advice or recommendation and should not be construed as such.
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