and Evolution of Monetary Policy Framework in the Future --Keynote Speech by Governor Pan Gongsheng at the 15th Lujiazui Forum To Read Chinese Version Distinguished Party Secretary Chen Jining, Mayor Gong Zheng, Deputy
Director Wang Jiang, Minister Li Yunze, Chairman Wu Qing, Administrator
Zhu Hexin, and dear guests,
Good morning!
It’s a great pleasure to join you at the Lujiazui Forum. Supporting the
development of Shanghai as an international financial center, and encouraging
foreign financial institutions and international financial organizations to settle in
Shanghai is a major task for the PBOC to implement important instructions of General Secretary Xi Jinping as well as the decisions and arrangements of the
CPC Central Committee.
We witnessed the ceremony to launch the IMF Shanghai Regional Center just
now. The IMF is an international financial organization of global significance.
We are confident that Shanghai Regional Center will deepen the cooperation
between the IMF and China, enhance macroeconomic policy exchanges and
coordination among countries in the Asia Pacific region, and safeguard global and regional financial stability.
The PBOC will work together with Shanghai Municipal Government, relevant
departments, and market institutions to support, as always, the development of
Shanghai as an international financial center and expand the high-level
opening-up of the financial sector.
Today, I would like to take this opportunity to have exchanges with you on
issues related to China’s current monetary policy stance and the evolution of
monetary policy framework in the future.
I. Current monetary policy stance
Since the beginning of this year, the global inflation has started to cool down,
but it is still strongly sticky. Some central banks such as the ECB have begun
their rate cuts while some others are still observing the developments and may
cut rates later this year. On the whole, central banks remain unchanged with
their high interest rates and restrictive monetary policy stance. China differs
somewhat from them. Our monetary policy stance is accommodative,
providing financial support for the continuous economic recovery.
In terms of the aggregates of monetary policy, the PBOC has adopted a variety
of monetary policy instruments, such as cutting the required reserve ratio and
policy rates, and bringing down market rates such as the loan prime rates
(LPR), which created a favourable monetary and financial environment for the
high-quality development of the economy.
At May-end, the year-on-year growth rate of the aggregate financing to the real
economy (AFRE) and M2 registered 8.4 percent and 7 percent, respectively,
both higher than the nominal GDP growth rate of 4.2 percent in the first quarter
of this year. The interest rate on new loans issued in May stood at a relatively low level of 3.67 percent.
Concerning the structure of money and credit, the PBOC gave full play to the
role of macro-prudential policies and structural monetary policy instruments.
We have initiated the central bank lending for sci-tech innovation and
technological transformation, which aims to enhance financial support for sci-
tech innovation and equipment upgrading and renovation. We have launched a
package of policies to support the real estate sector, including lowering the
minimum down payment ratios for individual’s commercial housing mortgages,
abolishing the mortgage floor rates, and cutting the interest rate on personal housing provident fund loans. We have also set up the central bank lending for
affordable housing, to accelerate destocking commercial properties in a
market-based manner.
Currently, outstanding structural monetary policy instruments register around
RMB7 trillion, accounting for about 15 percent of the balance sheet of the
PBOC. The instruments were set to support key areas and week links of the
national economy, such as the development of micro and small businesses
and green transformation.
Regarding the transmission of monetary policy, we have made efforts in
regulating market behaviors, making better use of existing low-
efficient financial resources, enhancing the efficiency of fund use, thus
smoothing the transmission of monetary policy.
Since the beginning of this year, we worked together with the National Bureau
of Statistics to improve the accounting method of the quarterly value-added of
the financial sector. The accounting method has been adjusted from reckoning
based on the growth of deposits and loans to income-based, which more
truthfully reflects the value-added of the financial sector, and weakens the
impulses of some local governments and financial institutions to shoot up
deposits and loans at crucial time points. Meanwhile, After decades of
operation as commercial and market-based entities, some financial institutions
are still obsessive about scale expansion. They expanded their scale through
undue and irrational competition, which was not supposed to happen. We
regulated some market behaviors that are irrational or may undermine the
transmission mechanism of monetary policy. For example, we promoted a
balanced supply of credit, reduced and prevented the circulation of funds
within the financial system, and rectified the behavior of luring depositors with
manual interest subsidy.
In the short term, these regulatory measures will have the effect of “squeezing
water” out of the financial aggregate data, but that does not stand for a shift in
the monetary policy stance. Instead, it will help us more in improving the
efficiency of monetary policy transmission, achieving a balanced pace of credit
growth, alleviating the distortions in resource allocation, easing the problem of
circulating funds for the sake of arbitrage, and forestalling and defusing
financial risks. It will also be conducive to providing high-quality financial
services for economic and social development as well as the healthy
development of financial institutions and financial markets.
As for exchange rates, the RMB exchange rate has remained basically stable
in complicated circumstances. Entering this year, we have seen the major
advanced economies postponing once and again their timing of monetary
policy reversal. Meanwhile, the China-U.S. interest rate spread has continued to be relatively high. Letting the market play a decisive role in the formation of
exchange rates, we have maintained the flexibility of the exchange rate while strengthening guidance of expectations and taking firm steps to prevent the
risks of exchange rate overshooting.
Through sustained effort over the years, China’s foreign exchange market has
achieved substantial progress and development, with market participants
becoming more mature and transacting in a more rational manner. An
increasing number of business entities are using the tools for exchange rate risk hedging. Moreover, as the RMB cross-border receipts and payments now
account for 30 percent of trade in goods, the exposure of enterprises to
currency exchange risks has been reduced. We are also more experienced in
coping with foreign exchange market fluctuations. As major economies are
gradually reversing their monetary policies this year and the dollar appreciation
is weakening, the difference between the monetary policy cycles at home and abroad is narrowing. These factors combined will help keep the RMB exchange rate basically stable and balance cross-border capital flows, thereby
gaining more space for China’s monetary policy maneuvers.
Looking ahead, while undergoing continued recovery, the Chinese economy is
still confronted with some challenges, mainly in that the effective demand is still insufficient; there are blockages to domestic economic circulation, and the complexity, severity, and uncertainty of the external environment have risen
significantly. Adhering to an accommodative monetary policy stance, we will
strengthen counter-cyclical and inter-temporal adjustments, help consolidate
and add momentum to the economic recovery, and create a favorable
monetary and financial environment for economic and social development.
In the process, we will pay special attention to the handling of three sets of
relationships. First, the relationship between short-term and long-term
concerns. Maintaining price stability and pushing for a mild rebound in prices
will be an important consideration. We will use interest rates, reserve
requirements, and other policy instruments in a flexible manner while maintaining policy resolve and avoiding drastic policy swings. Second, the
relationship between stabilizing growth and preventing risks. We will take a
coordinated approach in balancing the provision of support for the real
economy and the need to maintain the soundness of financial institutions. We
will be committed to forestalling and defusing financial risks while promoting
high-quality economic development. Third, the relationship between internal
and external concerns. In conducting the regulations, we will focus primarily on
domestic economic and financial conditions while taking into account the spillover effects from the economic and monetary policy cycles of other
economies.
II. Some thoughts on the evolution of future monetary policy framework
Based on years of practice and exploration, the monetary policy framework
with Chinese characteristics has preliminarily taken shape and witnessed
continuous improvement. Globally, explorations into the theory and practice of
monetary policy have also been evolving. Since the beginning of this year, in light of the changing situation, the European Central Bank and the Bank of
Japan have adjusted successively their monetary policy frameworks.
Meanwhile, the Bank of England has conducted a review of its policy making,
forecasting, and communication. To better serve the needs of high-quality
development, we are also conducting research on China’s future monetary
policy framework.
First, we will optimize the intermediate target variables for monetary policy. As prescribed by law, the ultimate objective of China’s monetary policy is to
maintain the stability of the currency value and thereby promote economic growth. To achieve the ultimate objective, we need to keep an eye on and target some intermediate variables in the execution of monetary policy. While
price-based regulation is prevalent in most of the major advanced economies,
China adopts a combination of quantity- and price-based regulatory measures.
Traditionally being quite attentive to the indicators of financial aggregates, we
have made continuous improvements and adjustments. In recent years,
specific quantitative targets are set no more in our monetary policy for the
growth rates of financial aggregates, such as M2 and social financing. They
have been replaced by qualitative descriptions such as “being basically aligned with nominal economic growth”.
The monetary and credit growth as needed by the real economy is also
changing with high-quality economic development and structural
transformation. The changes in the growth rates of monetary and credit aggregates essentially reflect the structural changes in China’s economy and
the associated supply-side structural changes in China’s financial sector.
When we look at aggregates from a mathematical perspective, the growth rate
is the ratio of the current increase to the total existing amount, with the former being the numerator and the latter the denominator. Currently, as the
outstanding amount of social financing in China has exceeded RMB390 trillion
and M2 stands at over RMB300 trillion, China’s macro financial aggregates are
huge. However, we should be aware that many of the existing loans are being used with low efficiency, mobilizing such loans is essentially as significant to
economic growth as issuing new loans.
In terms of the changes in the credit structure, of the outstanding loans totaling
almost RMB250 trillion, real estate loans and local financing vehicle loans account for a large share, which is declining rather than expanding. Only after
having offset the decline, can the increase in other loans be reflected. As a result, it is quite difficult to maintain an overall credit growth of over 10 percent
as seen in the past.
The measurement of money supply should also be improved constantly to
adapt to the changing situation. China’s statistical coverage for M1 was set 30
years ago. With the facilitation of financial services and the rapid development of financial markets and financial innovations such as mobile payment, major changes have taken place to the range of financial products that meet the
statistical definition of money supply, particularly that of M1, entailing dynamic
improvements to the statistical coverage of money supply. Judging by the
functions of money, we should work on incorporating in M1 statistics personal
demand deposits and some highly liquid financial products, which can be even used to make direct payments, so as to better present a true picture of money supply.
We can also continue to refine intermediate variables for monetary policy, and
gradually weaken our focus on quantitative targets. When the growth of money and credit has pivoted from supply constraints to demand constraints, it
obviously runs against the law of economic performance if the emphasis
remains on quantitative growth, or even “the obsession with aggregates”
exists. Financial aggregates are to be viewed more as indicators for
monitoring, reference and projection, and the role of interest rates in economic
regulation should be more highlighted.
Second, we will further improve the market-based system for interest rate
regulation. We have liberalized interest rates in recent years, and basically set up a mechanism for their formation, regulation, and transmission. From central
bank policy rates to benchmark market interest rates, and then to various financial market interest rates, they witnessed relatively smooth transmission
in general.
There is still room for improvement. For instance, a large variety of central bank policy rates exist, and the relationship among the interest rates of various monetary policy instruments is rather complex. Certain central bank’s short-
term operational rate can be specified as the main policy rate, and the 7-day reverse repo rate basically fulfills this function. Therefore, the interest rates on
other monetary policy instruments with different tenures may soften their roles as policy rates, and the transmission from short-term to long-term interest
rates should gradually become smoother. Meanwhile, continued efforts will be
made to reform and improve the LPR. Targeting that some LPRs significantly deviate from the actual prime rates for clients, the focus is on improving the LPR to more truthfully reflect the level of interest rates on the lending market.
Central banks usually use the interest rate corridor as a supportive resource in
steering short-term interest rates, “binding” money market interest rates into a certain range. China’s interest rate corridor has now taken initial shape, with
the SLF rate as a ceiling and the rate on excess reserves as a floor. The width is relatively large, which is helpful to leverage the role of market in pricing and
stays resilient and flexible enough.
Recent movements of money market interest rates show that market interest
rates have been running stably around policy rates, with significantly narrowed fluctuations. If we give greater play to the role of interest rate regulation in the
future, we need, and we have the condition to signal a clearer target to assure the market. In addition to the clarification of the main policy rate, an
appropriately narrowed interest rate corridor may also be needed.
Third, we will gradually include the purchase and sale of China
government bonds on the secondary market in our toolkit. Recently, the market
has paid more attention to this. We have been enriching and improving our methods for the injection of base money. And over a certain period in the past, the injection was passive through funds outstanding for foreign exchange. Since 2014, as such funds declined in amount, we have acted proactively to
inject base money through open market operations and MLF, among other
tools.
In recent years, the size and depth of China’s bond market enhanced with the
rapid development of its financial market. So the conditions have been mature for the central bank to inject base money through the purchase and sale of
China government bonds on the secondary market. It was noted at last year’s Central Financial Work Conference that we should enrich our monetary policy
toolkit and gradually include China government bond buying and selling in
open market operations. The PBOC is now increasing communication with the
Ministry of Finance to promote joint research on the implementation. The
whole process is gradual, and the research on how to improve the issuance
pace, term structure, and depository system for China government bonds is to
be conducted at the same time.
It should be noted that including China government bond buying and selling in the monetary policy toolkit does not mean quantitative easing. Instead, it is
meant to be a channel for base money injection and a tool for liquidity
management. The China government bond transaction, both sale and
purchase, will play its role together with other tools and create a suitable liquidity environment.
Rapid development of the financial market poses new challenges to the central
banks. The failure of Silicon Valley Bank reveals that central banks need to
observe and evaluate the financial market situations from a macro-prudential
perspective, and correct and intercept the accumulation of market risks in a
timely manner. At present, central banks should give special attention to
maturity mismatch and interest rate risks arising from the large holding of
medium- and long- term bonds by non-banking institutions, aiming to maintain
an upward sloping yield curve and to help the market provide positive
incentives for investment.
Fourth, we will improve the structural monetary policy instrument system which is precise and moderate. Traditionally speaking, the monetary policy adjusts
aggregate. However, many problems and challenges in China’s economic
development are structural. If they are not properly solved, the effectiveness of
aggregate adjustment will be restricted. Around the world, since the global
financial crisis, especially in response to COVID-19 in 2020, central banks in
the major economies, such as the US and the euro zone have launched a series of structural monetary policy instruments targeted for specific areas,
entities and purposes.
We have been exploring how to leverage the guiding role of structural
monetary policy instruments. And we have accumulated some experience and
good practices in the process. For instance, structural monetary policy
instruments should follow the principle of remaining targeted, reasonable,
moderate, and flexible, and they are expected to be complementary to the
aggregate instruments. By incorporating incentive mechanisms into the
structural instruments, we guide financial institutions to optimize credit
structures in a market-oriented way while guarding against moral hazards.
In the future, when using structural monetary policy instruments, we will
continue to properly use and enrich the experience we have accumulated and improve relevant institutional frameworks. We will appropriately manage the
scale of structural instruments and withdraw those that have reached their
temporary goals in a timely way.
Fifth, we will enhance the transparency of monetary policy and improve the
policy communication mechanism which is reliable, regular, and
institutionalized so as to ensure effective policy communication and
expectation guidance. An important feature of the modern monetary policy
framework is that central banks can communicate with the market and the
public about policy considerations and prospects in a transparent, clear, and
timely manner. Enhanced transparency will make policies more
understandable and authoritative, and the market will hence have a stable
expectation for the policy trend in the future and adjust its decision-making
accordingly. In this way, monetary policy adjustments will achieve multiplier
effects. My speech today is exactly an effort towards this goal and we will
make continuous effort to do a good job in central bank communication.
Last but not least, I’d like to wish 2024 Lujiazui Forum a complete success.
