The People's Bank of China

How China's central bank differs from Western central banks, the many tools it uses, and how it manages the yuan.

The People’s Bank of China, or PBoC, is the central bank of the world’s second-largest economy. It works differently from central banks like the U.S. Federal Reserve or the European Central Bank.

Not independent in the Western sense

The PBoC operates under the State Council, China’s cabinet, and major decisions require government approval. It pursues multiple goals, including price stability, growth, employment, financial stability and the exchange rate.

Many tools

Rather than relying mainly on one policy rate, the PBoC uses a wide range of tools:

Policy interest rates, including the seven-day reverse repo rate, which became its main short-term policy rate, and the Loan Prime Rate, a benchmark for bank lending.
Reserve requirement ratio: the share of deposits banks must hold at the central bank. The PBoC changes it frequently to influence lending, unlike many Western central banks.
Targeted lending facilities to channel credit to priority sectors, such as small businesses or affordable housing.
Window guidance: informal instructions to banks about lending.

Managing the yuan

China’s currency, the yuan or renminbi, is not freely floating. Each day, the PBoC sets a reference rate, and the yuan can trade within a band around it in mainland markets. In August 2015, the PBoC changed how it set the reference rate, and the yuan fell by nearly 2 percent in a day, surprising global markets. China also has capital controls limiting money flowing in and out.

Digital yuan

The PBoC has been a pioneer in developing a central bank digital currency, the e-CNY, testing it widely in Chinese cities.

Cutting the reserve requirement

To support a slowing economy, the PBoC cuts the reserve requirement ratio by half a percentage point. Banks now need to keep less money locked up at the central bank, freeing hundreds of billions of yuan for lending. This tool is used frequently in China but rarely in many Western economies, which rely more on interest rates.

Thinking all central banks work like the Federal Reserve

Central banks differ in independence, goals and tools. The PBoC combines interest rates with reserve requirements, targeted lending and guidance, within a system where the government plays a central role.

Key takeaways

The PBoC operates under China's State Council and pursues multiple goals.
It uses policy rates, reserve requirement changes, targeted lending and window guidance.
It manages the yuan through a daily reference rate and capital controls.
It is a leader in developing a central bank digital currency, the e-CNY.