China has been resetting its financial regulatory structure and monetary mechanism, while also reshuffling its 476 trillion yuan (US$67 trillion) financial industry, as President Xi Jinping released a grand ambition of turning the country into a financial superpower.

And in Pan Gongsheng’s first year of governor of the People’s Bank of China, having replaced Yi Gang in July 2023, China’s central bank has conducted at least three large monetary adjustments to fulfil Xi’s vision and try to make the regulator as influential as the US Federal Reserve.

1. Pivot to price-based tools

China’s central bank has been pivoting to monetary tools, such as reverse repo rates, loan prime rates and yield curve controls, and moving away from quantitative measures like bank credit.

In recent years, it has also no longer set a growth target for M2 – the broad money supply gauge – new bank loans or aggregate financing.

The shift reflects China’s fast changing economic and financial landscape, with market liquidity seen as ample after rounds of stimulus since 2008, and concerns about risk exposure and a liquidity trap.

M2 had jumped to 303 trillion yuan (US$42.6 trillion) at the end of July from 47.5 trillion yuan at the end of 2008.

China’s M2 is higher than US$21 trillion in the United States, although the two countries may employ different definitions.

The current size of aggregate financing – a term used by Chinese policymakers to measure the funding support for non-financial sectors – has increased tenfold from the end of 2008 to 396 trillion yuan at the end of July.

Monetary authorities in China have designed a variety of relending programmes to optimise the existing lending structure as they try to push more credit for tech sectors and control the flow to the crisis-hit property sector and local government financing vehicles.

2. Change to policy rate anchor

Beijing has built an interest rate corridor, now a range between 2.7 and 0.35 per cent to help anchor market expectations and ensure central bank policies can be effectively implemented.

The one-year medium-term lending facility (MLF), which now stands at 2.3 per cent, was widely watched as a key policy rate in the past and each rollover of MLF loans could trigger rate changes from the PBOC.

We need and have the conditions to deliver clearer interest rate target signals to anchor market confidence

Pan Gongsheng, PBOC governor

However, governor Pan said in June that the central bank would place more emphasis on short-term rates than the one-year MLF, while it is also considering narrowing the interest rate corridor for better monetary policy transmission.

“The seven-day reverse repo rate has basically shouldered the function,” he told the Lujiazui forum in June in Shanghai.

“We need and have the conditions to deliver clearer interest rate target signals to anchor market confidence.

“In addition to clarifying the main policy rates, it may also be necessary to moderately narrow the width of the interest rate corridor.”

The seven-day reverse repo rate is now 1.7 per cent.

3. New money supply tool

Some 10 months after President Xi ordered the use of treasury bond trade to adjust liquidity, China’s central bank announced on Friday that it had bought short-term treasury bonds from primary dealers and sold long-term bonds, with a net purchase of 100 billion yuan (US$14 billion).

The PBOC conducted its first treasury bond trade in nearly two decades in open markets, debuting a long-awaited monetary tool to help manage the domestic bond market and stabilise the economy.

The move marked a gradual shift from the money supply mechanism being driven by outstanding foreign exchange funds between 2002 and 2014, and that had relied on reserve requirement ratio cuts, the MLF and daily open market operations over the past decade.

While the central bank denies quantitative easing, questions remain how much the central bank would expand its balance sheet and how it can resist financing requests as Chinese authorities have increasingly resorted to government bonds sales to drive up its economy.