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The PBOC released its Q2 monetary policy report (MPR) on Thursday. The report sounds a bit hawkish, quite consistent with recent policy communications such as the recent Politburo meeting statement. As per the report, PBOC would make its prudent monetary policy more flexible and targeted, and keep liquidity appropriately ample to support economic recovery. It is particularly worth noting that PBOC in the report said excessively low interest rates will lead to misallocation of resources. That's the first time PBOC has talked about the possible negative(s) of low interest rate policy since the counter-pandemic stimulus introduced in Q1. Signals now become much clearer: PBOC has no intention to make further broad-based reductions in interest rates or the RRR.

In regard to interest rates, PBOC specifically said it would "guide market interest rates to smoothly operate around OMO (open market operations) and MLF (Medium-term lending facility) rates". That means PBOC would prevent repo rates from deviating significantly from the OMO rates. As such, there is a good chance the interbank 7-day repo rate will keep seesawing in a 2.10-2.30% range during most of Q3 if PBOC keeps the 7-day OMO rate unchanged at 2.20% (chart 1).

   

China Insight

 

After this report was released, we don’t expect PBOC will let liquidity ease much further in Q3 (chart 2).

 

China Insight

  

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