Central Bank of China (PBOC) Expand "Arsenal" of Monetary Policy – The Beginning of a New Cycle?

[Igor Pereira]

Traders, while the world looks at Fed and BOJ, the People's Bank of China (PBOC) is silently rewriting their engagement rules.

By Igor Pereira Financial Market Analyst

The announcement that PBOC plans "expand your monetary policy toolkit" it is not just bureaucracy; it is a tectonic change in the way China manages its economy. They're coming out of passive tools for active and surgical intervention.

Below is the autopsy of what is this "new arsenal" and how it impacts its trades in Commodities, Coins and Indexes.

PBOC officially introduced a new liquidity tool: Outright Reverse Repos.

• The Mechanism: Before, the PBOC used 7-day repos (shortest term) or 1-year MLF (medium term). Something was missing in the middle. Now, they can inject liquidity over time. 1 month to 1 year monthly.

• The Game Change: This allows PBOC to flood the banking system with money exactly when necessary (as at the end of the year, when they win $400 billion in MLF loans), without having to make dramatic and noisy cuts in interest rates all the time.

• Bond Trading: PBOC is also activating the purchase and sale of Treasury securities in the secondary market. This is, in practice, a Chinese version of Quantitative Eating (QE) and Interest Curve Control. They can now directly manipulate the yield of the bonds to ensure that the government finances cheaply.

PBOC is not just trying to save GDP; they are trying to save the stock market.

• The Swap Facility (SFISF): Part of this new kit includes allowing financial institutions to exchange their illiquid assets (such as shares and ETFs that nobody wants to buy) for liquid assets of the Central Bank. That puts an artificial "step" in the Chinese stock market.

• The Signal: The government is saying: "We'll be the ultimate buyer." For indices such as China A50 or Hang Seng (HK50), this is a sign of strong institutional purchase in falls.

For Yuan (CNY/USD): MANAGED STABILITY

• With these new tools, PBOC can inject liquidity without necessarily depreciating the currency aggressively. The goal is to keep Yuan stable to avoid capital flight while stimulating the internal economy. Don't expect a Yuan collapse, but a slow, controlled devaluation.

For commodities:

China is the world's largest consumer. When the Central Bank facilitates credit for infrastructure and manufacturing (via these new tools), the physical demand for Copper and Iron ore It tends to rise.

Trade: Stay tuned for AUD/USD, which is the main proxy for this Chinese growth.

The Dragon has woken up and now has more sophisticated tools to combat deceleration. Do not fight Chinese liquidity.

My Vision: China is migrating to a "Fed" style management model, with more frequent and direct interventions.

1. Note: The end-of-year liquidity level will be the test. If PBOC uses these new tools aggressively in November/December, we will have a Christmas rally on Asian risk assets.

2. Attention to Copper: If the stimulus works, the Copper will be the first to break maximums.

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"> Game Turned: The Reverse Carry Trade

With interest falling in China and rising/maintaining in Japan, there is an opportunity for cross-arbitration between the Asian currencies that few are seeing.

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