PBoC Gets Active, Will Intervene Daily; Pursuit of Stability Will Bring Instability

Bloomberg: PBOC Adopts Daily Open-Market Operations, Enhancing Rate Signals

China’s central bank said it will start conducting open-market operations every business day, strengthening its influence on interest rates.

...The PBOC has been trying to establish an interest-rate corridor to set borrowing costs after scrapping a ceiling on deposit rates in October. The central bank has hinted it will use the seven-day repurchase rate as the new benchmark rate, with its Standing-Lending Facility as the ceiling and the rate paid on excess bank reserves as the floor of the corridor.

The PBOC has told banks it can provide funds through its Medium-term Lending Facility at 2.85 percent for six-month loans, down from 3 percent, according to a person with direct knowledge of the matter. The one-year borrowing rate eased to 3 percent from 3.25 percent, according to the person, who asked not to be identified because the plans aren’t public.

To understand why this is a terrible idea, here's the a clip from the Chinese report at iFeng. 央行：即日起原则上每个工作日均开展公开市场操作

"Like! Like! Seeing the central bank every day!!! Stabilizing the market will save a lot of trouble."

"This is a learning from the Fed, readily supply bullets..."

"Open market every day, ready to solve market problems, the management of liquidity is a big plus! This must be praised!"

All is well, the central bank is here to control the market.

Guo Caomin of Industrial Bank wrote:

First, since the central bank open market operations only increased the frequency of open market operations, in uncertain circumstances, the more the central bank in the market to the table determined to show that they have confidence and ability to maintain appropriate and sufficient liquidity.

Second, the move is line with international standards. US short-term open market operations primarily repurchase and reverse repurchase, since September 17, 2014, the Fed was in each working day reverse repurchase operations.

This is a tacit admission that the PBoC is facing it's biggest crisis in history, if it is copying a Fed action taken when QE3 was expiring.

Third, the short term, increase the frequency of open market operations like a giving reassurance to the market, helps stabilize expectations and reduce the money market interest rate fluctuations. More importantly, in the long run, each business day open market operations can be further consolidated "interest rate anchor" position of open market operations, interest rates, the central bank can be more flexible, more quickly to liquidity management, strengthen the fine-tuning for the future better transfer of monetary policy to prepare. The new rate system increasingly clear.

The part about "giving reassurance" could also be translated as giving the market a tranquilizer. Though I do not believe it is the correct interpretation of the words, it is a more accurate description of what is taking place. As has been done in developed countries facing the crisis of deflation, the central bank is inserting itself into the market to a much greater degree.

Short-term impact may be positive for markets as it has been in other countries. It may also help increase outflows if it keeps the financial markets humming, since some percentage of the money floating around is looking for an exit. The long-term result is unknown because no country has yet to exit from extraordinary monetary policy. No country has returned to a pre-crisis levels of growth. The Fed is trying to normalize, but it is not the first central bank to try. Japan tried and abandoned the effort. The PBoC taking a step on the path towards extraordinary monetary policy is not a good step.