Strategy
Date:2019/11/20

On November 19, 2019, Yi Gang, Governor of the People’s Bank of China (PBOC) and Director of the Office of the Financial Stability and Development Committee under the State Council, presided over a meeting to analyze the monetary credit situations faced by the financial institutions and deploy the monetary credit work for the next step. Recently, the PBOC has first adjusted the MLF rates and then the reverse repo rates, and now the new LPRs are going to be released tomorrow, an indication that the domestic economy still faces great challenges. The PBOC must take countermeasures. This deployment meeting was held in a bid to more vigorously support the real economy in monetary credit aspects.

First, to continue to strengthen counter-cyclical adjustments. In 2019, the overall tone of the domestic monetary policy remained prudent and easing, timely and appropriate. Emphases had been placed on improving the transmission efficiency of the monetary policy, providing more targeted support for the real economy enterprises, and further lowering the social financing cost. Such a monetary policy was highly effective, indeed. However, what cannot be neglected is that China’s macro economy still faces downward pressure with partial credit contraction. Therefore, Yi Gang stated that continued efforts should be made to strengthen counter-cyclical adjustments, beef up credit support for the real economy, maintain the increases in M2 money supply and aggregate financing in keeping with nominal GDP growth, and promote the economic indicators to stay in an appropriate range.

Second, to refine the monetary policy transmission mechanism through reform. On the meeting, it was insisted that finance serve the real economy, prudent monetary policies executed, the counter-cyclical and structural adjustments be strengthened, and the key role of the banking system in financing the real economy be given full play to promote the virtuous cycle of finance. This requires multiple monetary policy tools, such as targeted RRR reduction, re-lending, and rediscounting, and innovative and rich monetary policy tool sets, thus to form a structured monetary policy tool of adjustment precision. Meanwhile, this also requires coordination among multiple departments to guide and optimize the credit structure and strengthen the financial support for the small and medium-sized enterprises as well as other weak links.

Third, to maintain appropriate and balanced by “Three Combinations”. According to the meeting, emphases should be placed on the combination between reform and regulation, short term and long term adjustment, and internal and external balance. The monetary policy need to be formulated and implemented in a timely and appropriate manner. It is required that macro reform be made with an eye to micro regulation, long-term regulation in light of short-term adjustment, and international economic structural adjustment with a view to external balance.

Fourth, to give full play to the role of LPR in bringing down loan interest rates. In the next step, the PBOC needs to carry on with good LPR quotation and application to guide and supervise the reasonable pricing in the financial institutions, further break the implicit lower limit of loan interest rates, unblock the channel to transmit market interest rates to loan interest rates, and speed up the study and issuance of the plans to convert the interest rate benchmarks of existing loans. Meanwhile, the PBOC needs to maintain the competition order in the deposit market and keep the debt costs of banks basically stable.

Five, to continue to push forward the capital supplement work. The commercial banks need to further push forward the capital supplement work and improve their credit supply to create better financial conditions for the real economy.


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