Box 1 Remarkable Progress in Improving the Modern Monetary Policy Framework Improving the modern monetary policy framework is an important...
Box 1 Remarkable Progress in Improving the Modern Monetary Policy Framework Improving the modern monetary policy framework is an important part of building a modern central banking system. It serves as an institutional base for implementing the sound monetary policy well and for conducting an intertemporal policy design, and it also satisfies the intrinsic need to promote high-quality development. In recent years, improvements in the modern monetary policy framework have made remarkable progress. According to the arrangements of the CPC Central Committee and the State Council, the PBC has improved the mechanism for money supply management, enhanced the market-oriented interest rate formation and transmission mechanism, innovated and expanded the system of monetary policy instruments, and optimized the RMB exchange rate formation mechanism. First, the mechanism for money supply management has been improved. According to the guidelines of the Central Economic Work Conference and the requirements set forth in the Report on the Work of the Government, growth of broad money (M2) and outstanding AFRE should match the nominal economic growth. The PBC has precisely identified banks as the direct subject of money supply, and it has improved the mechanism for money supply management by bringing into shape longterm mechanisms for liquidity, capital, and interest rate constraints.
It comprehensively utilizes a wide array of monetary policy instruments to keep liquidity adequate at a reasonable level and to alleviate liquidity constraints. From 2018 to 2021, the average growth of M2 in China was 9 percent. The PBC has seen perpetual bonds as a breakthrough in motivating banks to replenish capital via multiple channels so as to ease capital constraints. In January 2019, the first perpetual bond of the banking sector was issued. As of end-March 2022, banks have cumulatively issued RMB1.8915 trillion worth of perpetual bonds, motivating banks to issue loans of approximately RMB10 trillion. Overall corporate financing costs have dropped steadily, which has eased interest rate constraints. The weighted average interest rate on loans to enterprises gradually declined to 4.36 percent in March 2022, a record low since statistics became available. From 2018 to 2021, the average growth of M2 was virtually on par with the nominal GDP growth of 8.3 percent over the same period. This has contributed to the long-term optimized combination of economic growth, price stability, and full employment. 5 Second, the market-oriented interest rate formation and transmission mechanism has been enhanced. In line with the arrangements of the CPC Central Committee and the State Council, in August 2019 the PBC released a notice on the reform and improvement of the loan prime rate (LPR) formation mechanism. The reformed LPR is based on market-oriented quotes by panel banks that take into account the trend in market rates with reference to the MLF rate. This has not only made loan rates more market-based but it has also developed a transmission mechanism featuring “market rates+central bank’s guidance→LPR→loan rates,” making monetary policy transmission much more efficient. At present, the pricing of new loans basically uses the LPR as the benchmark, and the shift to the LPR as the pricing benchmark was completed in August 2020 for outstanding floating-rate loans. Meanwhile, the PBC continues to optimize regulation of deposit rates. In June 2021, it guided the selfregulatory mechanism for interest rates to modify the self-regulated ceiling of deposit rates by adding a margin to the benchmark interest rates. The PBC has strengthened regulation of non-standard deposit innovation products and has maintained orderly competition in the deposit market. In April 2022, it guided the self-regulatory mechanism for interest rates to establish a market-oriented adjustment mechanism of deposit rates, and it motivated banks to reasonably adjust deposit rates in accordance with the changes in market rates, which made deposit rates more market-oriented. In terms of effectiveness, since the LPR reform in August 2019, the weighted average rates on enterprise loans has declined from 5.32 percent in July 2019 to 4.36 percent in March 2022, or a cumulative drop of 0.96 percentage points, higher than the 0.55 percentagepoint drop in the LPR over the same period. This has effectively promoted an ongoing notable drop in the real loan rates and has largely eased the financing difficulties long faced by the MSBs and has lowered their financing costs. Third, the system of monetary policy instruments has been innovated and improved. The PBC has accommodated the intrinsic need for high-quality development, attached importance to introducing an incentive compatibility mechanism, innovated and applied structural monetary policy instruments, and guided financial institutions to step up support for relevant areas in line with the new development concept.
Since 2018, it has cut the reserve requirement ratio (RRR) for 13 times, releasing long-term funding worth approximately RMB10.8 trillion. At endApril 2022, the average RRR for financial institutions stood at 8.1 percent, 6.8 percentage points lower than that at the beginning of 2018. Instruments such as central bank lending and discounts have been adopted. At the beginning of 2021, an additional RMB200 billion of central bank lending was made available to ten provinces (regions) with slow credit growth. To promote coordinated regional development, the PBC adopted a multi-pronged approach when guiding financial institutions to provide more credit to regions with slow credit growth. In November 2021, the Carbon Emission 6 Reduction Facility and the special central bank lending for the clean and efficient use of coal were launched in parallel to precisely promote green and low-carbon development. Since January 1, 2022, the two monetary policy instruments that directly support the real economy have been converted into market-oriented policy instruments in support of MSBs. In particular, the instrument supporting deferred repayments on inclusive MSB loans was converted into an instrument supporting inclusive MSB loans. For inclusive MSB loans issued by eligible locally incorporated banks,
the PBC offers incentive funds, which are 1 percent of the increment in the MSB loan balance. The support plan for inclusive unsecured MSB loans was incorporated into management of central bank lending that supports rural development and MSBs. The RMB400 billion central bank lending originally arranged to support inclusive unsecured MSB loans can be rolled over. Recently, special central bank lending for sci-tech innovation and inclusive elderly care has been launched to motivate financial institutions to step up support for these two areas. At end-March 2022, outstanding inclusive loans to MSBs was RMB20.8 trillion, 2.5 times that at the beginning of 2018. These loans supported 50.39 million MSBs, 2.2 times that at end-2018. The weighted average interest rate on new inclusive loans to MSBs posted 4.93 percent in 2021, a drop of 0.22 percentage points from 2020 and of 1.38 percentage points from 2018.
http://www.pbc.gov.cn/en/3688229/3688353/3688356/4583781/4584048/2022062209443031445.pdf
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