China’s Monetary Policy Moves towards Aggregate Stability and Credit Easing

On February 11, the People’s Bank of China (PBoC) released the China Monetary Policy Implementation Report for the Fourth Quarter of 2021 (hereinafter referred to as the “Report”). The Report examines the central bank’s transition to a moderately loose monetary policy in the fourth quarter of 2021, as well as the macro condition and monetary policy outlook for 2022. In the view of ANBOUND researchers, monetary policy will continue following the moderately relaxed framework to achieve the goal of “stable growth”. However, when it comes to quantitative and structural policies, the central bank continues to highlight the fundamental framework of giving quantitative and structural policies equal weight.

This implies that the central bank’s monetary policy would adopt more structural measures to tackle the problem of credit easing, in order to increase the ability of social credit creation, on the basis of sticking to aggregate “stability”.

Regarding the implementation of monetary policy in 2021, the central bank report concluded that it basically achieved its policy objectives. These are reflected in the following: first, monetary and social financing growth rates matched and were slightly higher than nominal GDP growth rates, ensuring a “reasonable abundance” of liquidity; second, the macro leverage ratio remained stable but is decreasing; third, credit rates declined; fourth, the financing structure has improved, and support for SMEs and the real economy has increased; Fifth, the exchange rate has been stabilized and has added to its flexibility. The Report suggests that monetary policy in 2021 showed flexibility, precision, rationality, and moderation, while major financial indicators continued to maintain strong growth on a high base in 2020, with solid financial support for the real economy. Thus, in the future, monetary policy will still be adjusted around these aspects, which constitute the main aspects of monetary policy objectives.

As for the future trend of monetary policy in 2022, the Report shows that a prudent monetary policy should be flexible and moderate. It also requires the strengthening of cross-cycle regulation, at the same time emphasizing on the dual functions of monetary policy tools in terms of quantitative and structure. It is important to focus on adequate, accurate and forward-looking efforts, not only to refrain from engaging in strong stimulus policies, but also to meet the reasonable and effective financing needs of the real economy. Concurrently, it should increase the financial support for key areas and weak links in order to develop a better blend of steady total volume and outstanding structure. This practically indicates that, after encouraging aggregate easing in the previous phase, the PBoC has begun to revert to a long-term strategy that emphasizes both quantitative and structural factors. In particular, the Report believes that the gap between supply and demand of the global economy is expected to close in the future, and coupled with the gradual emergence of the high base effect, it is estimated that the year-on-year growth rate of PPI in China will continue to decline in 2022. Overall, China’s economic supply and demand are basically balanced, and the PBoC’s implementation of normal monetary policy is conducive to the price trend to remain stable in the medium and long term. This judgment shows that in the future, domestic monetary policy will not adopt “overall easing” but will still remain prudent to maintain aggregate “stability”.

The monetary policy in the future will adhere to the “prudent” tone and focus on the policy framework that emphasizes on both quantitative and structural aspects. In terms of quantitative policy, the PBoC still follows its previous objective of “matching the growth of money supply and social financing scale with nominal GDP” and maintaining a stable macro leverage ratio. The continuation of this statement reflects that the policy objective of aggregate “stability” has not changed. The Report noted that, when analyzing the liquidity situation of the banking system, it is advisable to concentrate on the overall framework of the central bank’s liquidity management rather than local factors. It added that it would not be possible to simply add some short-and long-term influencing factors to estimate the liquidity surplus or deficit, let alone the maturity of monetary policy instruments as a factor affecting the liquidity of the banking system and use this to judge the degree of liquidity tightness. From here, it can be seen that the PBoC will center on maintaining stable liquidity on money supply issues, adhering to the long-term goal of annual or “cross-cycle”, and make changes in the growth or decrease of short-term liquidity to fully utilize monetary policy’s adjustment function.

The current total supply control, as it stands, is different from the currency, social finance, and credit mentioned earlier. This time, the PBoC gives more emphasis on maintaining the growth of the credit scale. This is also a response to the current slowdown in credit scale growth, indicating that the central bank’s focus has also shifted from easy money to easy credit. This is done so with the intention of further strengthening of the structural policy. The Report mentioned that it aims to improve the money supply regulation mechanism. It furthermore targets to continue easing the liquidity, capital and interest rate constrains on bank credit supply, in addition to cultivating and stimulating credit demand in the real economy, so as to guide financial institutions to effectively expand credit supply. The statement by the PBoC implies that money supply is merely one of the restraining factors in promoting credit growth. Bank capital replenishment and interest rate adjustment may be two other directions that will be undertaken by the Chinese central bank in the future to encourage credit development.

It is worth noting that this time, the central bank reemphasized not to engage in mass stimulus policies, and that the previous phase of a series of easing measures such as reserve requirement and interest rate cuts have achieved results. In the meantime, the pace of total easing in the future will be adjusted, with more emphasis on the function of “structural optimization” in order to further optimize the credit structure and serve as a major tool for adjusting credit costs. These are to increase support for small and micro enterprises, science and technology innovation, green development and other key areas. A significance of such a development is that, there will be some emphasis on the use of structural instruments in the future, and the corresponding expansion of the scale of refinancing instruments will continue to be maintained. For the future of real estate finance policy, the Report mentioned that it will firmly adhere to the position that houses are for living in, not for speculation. It insists that real estate should not be used as means of short-term economic stimulus. Moreover, it projects the objectives of stabilizing land and housing prices. It also mentioned implementing a prudent management system for real estate finance, increasing financial support for housing leasing, safeguarding the legitimate rights and interests of housing consumers, meeting the reasonable housing needs of homebuyers, and promoting the healthy development and virtuous cycle of the real estate market. From this point of view, the real estate market puts more emphasis on meeting “reasonable demand” and is not the main area for the central bank to promote credit scale growth.

The PBoC’s monetary policy report still focuses on the reform of interest rate and exchange rate mechanisms to promote the long-term goals of reducing financing costs and maintaining the stability of the renminbi exchange rate. Among the exchange rate objectives, this is a major highlight. It indicates that the central bank is more concerned about domestic “stable growth” and “risk prevention” and will continue to maintain an overall loose policy for a certain period of time, which may lead to a gap between the monetary policies of China and the U.S. The renminbi exchange rate may face some pressure after the Federal Reserve tightens its policy. Whether the PBoC’s monetary policy will converge to the direction of the Fed’s tightening policy in the future still needs to be determined by the development of China’s domestic economic situation.