China central bank should clarify rate policy, improve communication - working paper

BEIJING (Reuters) - China's central bank should clarify its new short-term policy rate and the target rate level as soon possible, according to a central bank working paper, as authorities in the world's second-largest economy slowly shift to a tightening bias.

These actions will help to stabilise expectations about the "interest rate corridor" framework, the paper published on the PBOC website on Monday said.

The PBOC has raised primary money market interest rates in small increments several times since late January, most recently last week, while trying to reassure markets with hints that it is in no rush to hike benchmark lending and deposit rates soon.

While the tightening ties in with one of the government's top priorities this year - containing the risks from a mountain of debt - market watchers are also wondering if the central bank is keen to tailor policy more precisely to better support the yuan currency rate and reduce pressure from capital outflows.

The working paper, authored by the head of the People's Bank of China's (PBOC) research bureau Xu Zhong, said the central bank has a lot of room to improve its communication with financial markets.

"(The PBOC) should increase the frequency, clarity, accuracy and consistency of information disclosures, and explore multiple channels to express its economic and financial views and policy intentions," said the paper.

The central bank has been developing an interest rate corridor, which is considered a step forward in financial liberalisation in which rates are set by the market within a band established by the PBOC using various short-term policy tools.

Some economists say the seven-day reverse repurchase rate has become a de facto policy rate, though the PBOC said the recent rate hikes do not constitute a benchmark policy rate increase.

The PBOC should also improve its open market operations (OMO) mechanism and expand the number of institutions eligible to receive funds through OMO and the standing lending facility (SLF) policy tool, the paper said.

These changes would help reduce arbitrage opportunities in the funding market and cut down on liquidity pressures that are amplified by the structure of the interbank lending market, the paper said.

(Reporting by Elias Glenn and Winni Zhou; Editing by Kim Coghill)