Summary:
This paper addresses the major policy agenda of “establishing a well-conceived, prudent monetary policy system” in the new era. Starting from the central bank's liquidity provision mechanism, it examines the institutional foundation, operational logic, and reform direction of precise monetary policy implementation in China. In a modern credit-money system, central bank liquidity provision is essentially the provision of reserves to the banking system. Reserves constitute the foundation for payment settlement, money creation, and interbank transactions by commercial banks, and they are also a key variable in the formation of short-term money market rates. Unlike major advanced economies, where reserve supply is mainly adjusted through open market operations, the supply and structure of reserves in China are jointly affected by changes in foreign exchange funds outstanding, the required reserve ratio, and a broad range of liquidity instruments, including open market operations (OMOs), the medium-term lending facility (MLF), the standing lending facility (SLF), pledged supplementary lending (PSL), relending and rediscounting facilities, and treasury cash management. These arrangements have formed a highly diversified reserve supply system. Therefore, understanding the transformation of China’s monetary policy framework requires returning to the starting point of monetary policy implementation: how the central bank supplies reserves to the banking system, how reserves from different sources affect the supply and demand of excess reserves, and how this reserve supply structure changes the precision of short-term interest rate control under the interest rate corridor system. Based on changes in the balance sheet items of the People’s Bank of China (PBOC), this paper first examines the linkage between reserve supply and the PBOC’s balance sheet operations. It incorporates into a unified analytical framework both the positive reserve supply channels, such as foreign exchange funds outstanding, claims on the government, claims on other depository corporations, and claims on other financial corporations, and the reserve-absorbing channels, such as currency issuance, government deposits, deposits of non-financial institutions, central bank bill issuance, and other liabilities. Using PBOC balance sheet data from 1997 to 2025, the paper documents the dynamic transformation of China’s reserve supply structure from one dominated by foreign exchange funds outstanding to one based on a combination of multiple liquidity instruments. The results show that, after 2014, as the growth of foreign exchange funds outstanding slowed and even experienced periodic contractions, the PBOC increasingly relied on active liquidity instruments such as OMO, MLF, and relending facilities to regulate reserve supply. China’s reserve supply mechanism thus shifted from a single-pillar structure dominated by foreign exchange funds outstanding to a dual-pillar structure jointly supported by foreign exchange funds outstanding and multiple liquidity instruments. This structural change has strengthened central bank’s capacity to adjust liquidity autonomously, but it has also created coordination challenges arising from differences in instrument maturities, operational targets, counterparties, and price signals. On this basis, the paper constructs a simplified model linking reserve supply, reserve demand, and the money market benchmark rate. The model shows that, under a scarce-reserveregime and an interest rate corridor system, the central bank must accurately forecast and adjust the supply-demand balance of excess reserves in order to achieve precise control over short-term operational target rates such as DR007. The model indicates that when reserve supply shifts from being dominated by foreign exchange funds outstanding to being jointly determined by multiple instruments, the variance of interest rate control deviations may increase, making precise monetary policy implementation more difficult. When the central bank simultaneously undertakes multiple objectives, including stabilizing growth, maintaining price stability, safeguarding financial stability, and supporting structural adjustment, structural monetary policy instruments can help promote policy goals such as green finance, inclusive finance, and technology finance. However, their use also changes the aggregate amount of reserves in the banking system, thereby affecting short-term interest rate control. Thus, while a multi-instrument framework enhances policy flexibility, it may also weaken the forward-looking nature and consistency of interest rate corridor operations. Empirically, the paper uses daily and monthly data from China’s interbank market from December 2014 to November 2025 to examine the effectiveness of interest rate corridor operations, the dynamic relationship between aggregate net liquidity injections and DR007, and the effects of the joint use of multiple liquidity instruments on DR007. The results show that when DR007 persistently deviates from the policytarget rate, the central bank usually responds through subsequent OMOs, indicating that open market operations have a relatively strong capacity for timely adjustment. However, the return of DR007 to the policy target rate is relatively slow, and deviations tend to persist for a considerable period, suggesting that there is still room to improve the persistence and forward-looking nature of policy operations. Further evidence from VAR and SVAR estimations, Granger causality tests, and impulse response analysis shows that there is no stable and significant dynamic predictive relationship between aggregate net liquidity injections and DR007, and that liquidity injection shocks have only a weak effect on DR007. When multiple liquidity instruments are included in the model simultaneously, the predictive effect of OMO net injection quantities on DR007 is generally insignificant, whereas the OMO reverse repo rate has a more significant predictive effect on DR007. It is worth noting that when the OMO net injection indicator is constructed either including or excluding the outright reverse repos and open market government bond transactions introduced by the PBOC after 2024, its impact on DR007 differs in statistical significance. This suggests that recent changes in the PBOC’s OMOs over the past two years have had subtle yet positive effects on market interest rates. In terms of policy implications, China’s future monetary policy frameworkcan strike an institutional balance between continuing to improve reserve supply management and gradually strengthening reserve demand management. If China continues to rely on a scarce-reserve-based interest rate corridor system, it will be necessary to improve the forward-looking nature of liquidity provision, strengthen coordination among OMOs, MLF, structural instruments, changes in government deposits, and required reserve ratio adjustments, appropriately optimize the width of the interest rate corridor, enhance the signaling effect of the policy target rate, and reduce conflicts among the objectives of different instruments. If the required reserve ratio continues to decline, excess reserves continue to rise, and multiple liquidity instruments coexist over the long run, China may further consider establishing a reserve demand management framework centered on the interest rate on excess reserves. By anchoring the short-term interest rate more effectively, such a framework could reduce the interference of reserve supply complexity with interest rate control.
张成思, 何启志, 刘泽豪. 中央银行流动性供给机制与货币政策精准调控[J]. 金融研究, 2026, 553(7): 1-19.
ZHANG Chengsi, HE Qizhi, LIU Zehao. Central Bank Liquidity Provision Mechanism and Monetary Policy Precision. Journal of Financial Research, 2026, 553(7): 1-19.
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