Why China’s Central Bank Could Become More Like the Fed

A bold step forward looms in the decades-long reform of how China conducts monetary policy, with Governor Pan Gongsheng leading the central bank to explore changes that would move it closer to how global peers including the Federal Reserve operate. Under the proposals laid out by Pan in a June speech, the People’s Bank of China would switch to using just one key short-term policy rate and start trading government bonds to manage liquidity. While crucial differences with Western peers would remain — there’s no claim of independence from the government and China remains opposed to quantitative easing — the shifts would mark the next step in a journey that began in the 1990s with market forces rather than communist cadres steering borrowing costs.

Currently, the PBOC uses a handful of rates. They include the most-watched one-year policy loan to commercial lenders, the medium-term lending facility and the seven-day reverse repurchase, a shorter-term policy loan. There’s also the loan prime rate, which is based on the MLF rate and published by the PBOC, and the standing lending facility rate, which is considered the upper bound of the interest-rate corridor, within which the PBOC guides market interest rates.