Intensify the implementation of the monetary policies that have been introduced to consolidate and strengthen the positive trend of economic recovery

On June 25, the regular meeting of the Monetary Policy Committee of the People's Bank of China for the second quarter of 2024 was held in Beijing. The meeting analyzed the economic and financial situation at home and abroad, and made arrangements for the key work in the financial field in the next step.

The judgment of the economic situation at this regular meeting is the same as that of the regular meeting in the first quarter, which is to put forward that "the mainland's economic operation continues to pick up and improve, and high-quality development is solidly promoted", while emphasizing that "it still faces challenges such as insufficient effective demand and weak social expectations". Wang Qing, chief macro analyst of Oriental Jincheng, told the Financial Times that behind this statement is that the effect of the policy of stabilizing growth in the early stage has continued to emerge since the second quarter, the resilience of external demand is strong, and the production and investment of high-tech manufacturing industry, which reflects the development of new quality productivity, have maintained a rapid growth momentum. However, mainly dragged down by weaker demand, China's manufacturing purchasing managers' index (PMI) fell into contraction territory again in May, indicating that the foundation for the current economic recovery is not yet solid in the context of the continuous adjustment of the real estate sector.

Focusing on the next step of monetary policy, the meeting proposed that it is necessary to accurately and effectively implement a prudent monetary policy, pay more attention to counter-cyclical adjustment, give better play to the dual functions of monetary policy tools, and strive to expand domestic demand, boost confidence, and promote a virtuous cycle of the economy.

Intensify the implementation of the monetary policy that has been introduced

The meeting proposed that it is necessary to intensify the implementation of the monetary policy that has been introduced. Since the beginning of this year, the People's Bank of China (PBoC) has comprehensively used a variety of monetary policy tools in terms of the total amount of monetary policy, including lowering the reserve requirement ratio, lowering the policy interest rate, and driving down financial market interest rates such as the loan market prime rate, so as to create a good monetary and financial environment for high-quality economic development. In terms of the level of loan interest rates, at present, loan interest rates are stable and declining, and continue to be at a historical low. In February this year, the prime rate (LPR) for loans with a maturity of more than 5 years fell by 0.25 percentage points, which exceeded market expectations, driving the loan interest rate to continue its downward trend at a low level.

In terms of the direction of monetary policy in the next stage, the specific formulation of this regular meeting is basically the same as that of the previous quarter. In terms of aggregate volume, the meeting continued the tone of "maintaining reasonable and abundant liquidity, guiding reasonable growth and balanced allocation of credit, and keeping the scale of social financing and money supply in line with the expected targets of economic growth and price levels". In terms of prices, it continues to propose "releasing the effectiveness of the reform of the loan market prime interest rate and the market-oriented adjustment mechanism of deposit interest rates, and promoting the steady decline in corporate financing and household credit costs." Wang Qing believes that this means that the next monetary policy will continue to work hard to stabilize growth.

It is worth noting that this meeting once again mentioned that "in the process of economic recovery, we should also pay attention to the changes in long-term yields". Recently, People's Bank of China Governor Pan Gongsheng made it clear at the 2024 Lujiazui Forum that the People's Bank of China will launch both buying and selling treasury bonds in the future, and reminded the bond market risk in the form of the Silicon Valley Bank case, once again expressing the People's Bank of China's high concern about long-term bond yields, emphasizing the need to maintain a normal upward slope yield curve and maintain the market's positive incentive effect on investment.

Effectively implement various structural monetary policy tools

The meeting proposed to do a good job in science and technology finance, green finance, inclusive finance, pension finance, and digital finance, continue to increase support for major strategies, key areas and weak links, and promote the acceleration of the development of new quality productivity. Effectively implement the various existing structural monetary policy tools, and promote the implementation and effectiveness of newly established tools such as re-lending for scientific and technological innovation and technological transformation, and re-lending for affordable housing. Increase financial support for large-scale equipment renewal and trade-in of consumer goods.

In recent years, the People's Bank of China has focused on inclusive small and micro enterprises, scientific and technological innovation, green development and other fields, and launched and implemented a series of structural tools to optimize the credit structure. After successfully achieving the goal, some tools have been withdrawn in a steady and orderly manner, creating conditions for the convergence and entry of market-oriented funds. Since the beginning of this year, the People's Bank of China has created another 500 billion yuan of reloans for scientific and technological innovation and technological transformation and 300 billion yuan of reloans for affordable housing to support the tapping of domestic demand and momentum growth.

At present, the balance of structural monetary policy tools is about 7 trillion yuan, accounting for about 15% of the balance sheet of the People's Bank of China, focusing on key areas and weak links of the national economy such as supporting small and micro enterprises and green transformation. According to Zhang Jun, chief economist of China Galaxy Securities, the scale of structural monetary policy tools will not expand indefinitely, but "focus on key points, reasonable and moderate, advance and retreat", and the tools that have achieved phased goals will be withdrawn in time, which means that the People's Bank of China will focus on implementation in the short term, rather than rapid expansion. Industry experts believe that in the next step, structural monetary policy tools should continue to be effectively connected with the five major articles of finance, and better guide the flow of financial resources to areas of urgent need.

In terms of real estate policy, the meeting emphasized "efforts to promote the implementation of the financial policy measures that have been introduced to achieve results, and promote the steady and healthy development of the real estate market". On May 17, the People's Bank of China launched the real estate finance "policy package", and at present, most cities across the country have followed up and implemented relevant policies and issued "local version" rules, which to a certain extent drove the release of housing demand, and also boosted residents' willingness to buy houses and market expectations.

"In the future, whether the market can continue to repair still depends on the pace and intensity of the next policy follow-up and the improvement of residents' income expectations." Chen Wenjing, director of market research at the China Index Research Institute, said that if the core cities continue to optimize the property market policies from both the supply and demand ends, it may further boost market expectations, and the short-term core city market is expected to gradually bottom out and stabilize, thereby supporting the national market.

Keep the RMB exchange rate basically stable at a reasonable and balanced level

In terms of the RMB exchange rate, the meeting proposed to maintain the basic stability of the RMB exchange rate at a reasonable and balanced level, implement comprehensive policies, correct deviations, stabilize expectations, resolutely correct pro-cyclical behavior, prevent the formation of unilateral consistent expectations and self-reinforcement, and resolutely prevent the risk of exchange rate overshoot.

Since the beginning of this year, the timing of the monetary policy shift in major developed economies has been postponed, and the interest rate differential between China and the United States has remained relatively high. The People's Bank of China (PBoC) has adhered to the decisive role of the market in the formation of the exchange rate, maintained exchange rate flexibility, strengthened the guidance of expectations, and guarded against the risk of exchange rate overshoot, and the RMB exchange rate has remained basically stable.

Market participants generally believe that recently, although the RMB exchange rate against the US dollar has fluctuated slightly, it is still relatively stable in this round of shocks, and has become a bright spot in the context of the general depreciation of Asian currencies, and the central bank has the conditions and ability to deal with foreign exchange market fluctuations.

"After years of continuous efforts, China's foreign exchange market has made great progress and development, market participants have become more mature, trading behavior has become more rational, and more and more business entities use exchange rate hedging tools. At the same time, the current cross-border payment and expenditure of RMB for trade in goods accounts for 30%, which reduces the exposure of foreign exchange risks faced by enterprises' production and operation. We also have more experience in dealing with the volatility of the foreign exchange market. This year, the monetary policies of major economies have gradually shifted, the momentum of US dollar appreciation has weakened, and the difference between domestic and foreign monetary policy cycles has tended to converge. Pan Gongsheng said at the 2024 Lujiazui Forum that the combined effect of these factors is conducive to maintaining the basic stability of the RMB exchange rate and the balance of cross-border capital flows, and expanding the operational space of the mainland's monetary policy.

Source: Financial Times-China Financial News Network