China's central bank is pulled in many directions by competing objectives, yet nimble use of diverse monetary tools is helping to ease tensions and meet the bank's goals.
Over the past year, the People's Bank of China (PBOC) has steered clear of interest rate cuts and avoided tinkering with reserve requirement ratios (RRR). An expanded range of tools, such as reverse repos and lending facilities, are managing liquidity and supporting growth.
On Wednesday, the PBOC again skipped reverse repo auctions, refraining from adding cash to the banking system now for 13 days, the longest stretch since daily open market operations began at the beginning of last year.
Since March 24, the PBOC has drained 490 billion yuan (about 71 billion U.S. dollars) from the system, claiming that liquidity remains at a "relative high level" despite a slight decline.
Skipping reverse repo auctions reduces leverage in the system and eases asset bubbles, according to Wen Bin, a researcher with China Minsheng Bank.
The PBOC also has a duty to help stabilize prices, support the yuan and stay focused on growth in a restructuring economy that is expanding at its slowest pace for a quarter of a century.
Last year, PBOC governor Zhou Xiaochuan promised a more "dynamic" way of managing the money supply to meet the demands of reform and development. The bank had lowered both benchmark interest rates and RRR five times in 2015, but made only one cut, to the RRR, early in 2016.
Lowering interest rates or RRR may stimulate growth, but runs the risks of fueling speculation about monetary easing, growing asset bubbles and putting the yuan under pressure.
This departure from traditional tools suggests growing attention to new financial risks, defusing them before they emerge and focusing on deleveraging. Leaving benchmark rates on hold, the central bank has been able to ensure liquidity, force more efficient use of capital and reduce leverage without choking off last year's promising rebound in the economy.
Wang Chuan of the National Academy of Economic Strategy wants the PBOC to expand its toolkit for short-term liquidity management and prioritize price stabilization and economic restructuring.
Continued improvements in the economy coupled with mild inflation give the central bank more room to maneuver. Data released Wednesday showed consumer inflation growth stayed low at 0.9 percent in March, while factory-gate prices rose at a slower pace, more evidence of steady economic growth and moderate inflation.
The PBOC will likely continue nudging market rates higher, but that is more about yuan weakness and deleveraging than inflation, according to Bloomberg chief Asia economist Tom Orlik.