The PBoC also has a few instruments to guide longer-dated rates: the medium-term lending facility (MLF), pledged supplementary lending (PSL) and other relending programmes with various collateral requirements.
The MLF and PSL require the collateral of highly-rated bonds, such as government bonds. At the same time, other relending programmes mainly aim at smaller banks that do not have enough eligible collateral. For instance, the PBoC expanded the trial of relending with credit asset collateral in October to nine more regions from two previously. The programme allows local financial institutions that do not have enough bonds to use loans as collateral.
These facilities look more like unconventional tools for unusual times. MLFs are akin to the ECB's long-term refinancing operations (LTROs) and PSL is similar to targeted-LTROs. The difference seems to be that the PBoC's scheme has more influence over how commercial (and policy) banks use the programme money.
Commerzbank says these unconventional tools may be temporary and are probably intended to serve following two purposes,
- First, before a benchmark yield curve is established and the monetary policy transmission matures, they supplement short-dated policy rates and offer guidance on long-term borrowing costs.
- Second, before a significant improvement in credit allocation and non-performing loan risk, the PBoC may prefer to reserve a degree of direct control over credit allocation and is willing to assume the credit risk, albeit with some strings attached.
