FSDC Frets over Blockages in China’s Monetary Policy Transmission Mechanisms

China’s Financial Stability and Development Committee (FSDC) has called for further “clearing out” of monetary policy transmission mechanisms, while a senior PBOC official has also pointed to the possibility of further targeted reductions in the required reserve ratio.

A recently convened meeting of FSDC called for more “focused research into the issues of  the further clearing out of monetary policy transmission mechanisms and strengthening of the ability to service the real economy,” according to a report from state-owned media.

FSDC said that these issues need to be addressed under the precondition that “overall liquidity is kept rationally ample.”

Ma Jun (马骏), a member of the Chinese central bank’s monetary policy committee, provided further clarification on FSDC’s policy signals in an interview with Xinhua.

According to Ma funds for private enterprises remain tight despite overall liquidity being ample. This is because there has been an “increase in influential factors that block mechanisms for the transmission of monetary policy” whenever the Chinese central bank pours liquidity into the banking system.

On the demand side, Ma pointed specifically to remarked reductions in the channelling of funds to areas such as local government debt, real estate, under-performing enterprises and overcapacity sectors.

On the supply side, Ma said that regulatory and accountability systems had been comprehensively strengthened, leading to a reduction in the risk preferences of capital markets.

As a consequence the current round of adjustments has led to a marked increase in the cost and difficulty of financing for small enterprises, private enterprises as well as environmentally friendly enterprises, with some private enterprises even forced to pursue joint-ventures with state-owned enterprises in order to obtain financing and “hidden guarantees.”

With regard to measures for resolving these problems and ensuring that capital is channelled to where it’s truly needed, Ma Jun pointed to the need for continued “clearing out” of monetary policy transmission mechanisms, as well as an increase in the targeted nature of “structured deleveraging.”

Ma said that Beijing should consider further improvements to measures such as macro prudential assessments and targeted reductions in required reserve ratios, as well as stronger re-financing, guarantees and discounting for certain enterprises; support for collective bond issuance by small and medium-sized enterprises, appropriate expansions in the scope of accepted loan collateral, and further clarification of arrangements during the transitional period for new asset management regulations.

Over the medium to long-term, Ma said that further systemic reforms should be launched to improve the transmission of monetary policy.

These include addressing the “hidden guarantees” and “implicit guarantees” enjoyed by state-owned enterprises in order to reduce the financing costs of private enterprises, and the establishment of a real estate tax as well as reforms to the land supply system in order to resolve a burgeoning property bubble.

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