PBOC Unveils New Method to Auction Its One-Year Loans to Banks

(Bloomberg) -- China’s central bank unveiled a new method for pricing its one-year loans to banks, the latest move in policymakers’ efforts to revamp their monetary toolkit.

The People’s Bank of China announced in a statement that from Tuesday banks will be able to bid for different prices on its one-year loans. Qualified lenders will be able to pay different interest rates for the loan, which will come in a fixed amount each month, according to the statement. 

The shift will better meet the diversified need of financial institutions and maintain ample liquidity in the banking system, the PBOC said. 

The change comes as the PBOC moves to downplay the previous role of MLF as the main policy rate. Over the past year, the bank has shifted to a simpler framework, where the seven-day reverse repo rate has became the key lever to signal policy direction.

“The fixed volume, auction by bids is another step taken to fade the role of MLF rate as a policy guidance,” said Frances Cheung, head of FX and rates strategy at Oversea-Chinese Banking Corp. “The cut-offs will now be determined by a price discovery process which will also help policy makers to gauge market demand and market interest rate levels.”

In a rare move, the bank also gave advance notice it will on Tuesday inject 450 billion yuan ($62 billion) of liquidity into the market. 

A total of 387 billion yuan worth of MLF have matured this month, which means there will be a net injection of 63 billion yuan via the tool. 

(Updates with additional details.)

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