The People’s Bank of China (PBOC) announced the introduction of short-term liquidity operations (SLO) on January 18, focusing on maturities of less than seven days. This move provides the central bank with greater flexibility to adjust liquidity levels in the financial system. Authors Li-Gang Liu, Hao Zhou and Louis Lam of ANZ Research, examine the new open market operations and analyse the success of the previous technique (reverse repo operations) used in China. They argue that the addition of SLO to the PBOC’s open market operations is a step towards eventual interest rate liberalisation, adding that SLO’s will help address what the reverse repos have failed to achieve. The authors then go on to investigate whether current monetary conditions in China are tight, loose or about right using the McCallum rule – an alternative to the Taylor rule – concluding that the current monetary conditions are marginally tighter than the policy rule they calculated.
This article was featured in a recent issue of Current Economics. You can download a sample at www.consensuseconomics.com.