PBOC narrows rate corridor, overcapacity worsens

The PBOC’s expanded open market operations effectively narrow the interest rate corridor for short-term interbank rates. This won’t have any immediate consequences for monetary conditions. But it does more clearly designate the 7-day reverse repo rate as the PBOC’s main policy rate.

The June inflation data are consistent with worsening overcapacity in China's manufacturing sector. But the degree to which price declines are being driven by increased supply versus weak demand varies greatly, as the contrast between automobiles and home appliances illustrates.