PBOC Research Head Calls for Shift Towards Price-based Monetary Policy

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The head of the Chinese central bank’s research department has published new working paper recommending further reductions in the required reserve ratio in order to reduce the burden on financial institutions, with a shift from quantity-based to price-based monetary policy.

The People’s Bank of China (PBOC) has just announced a 0.5 percentage point cut in the required reserve ratio effective as of 5 July, that will unleash around 700 billion yuan for debt-equity swap initiatives and financial inclusion measures.

State-owned press gave strong signals last week that the Chinese central bank would implement another targeted cut in the near-term, as Beijing’s ongoing deleveraging campaign makes it harder for small businesses to access funds, and ongoing trade frictions with the US threaten to weaken growth.

According to domestic press Xu Zhong (徐忠), head of the PBOC research department, recently came out in strong support of greater use of reserve cuts with a working paper published on the central bank’s official website entitled: “Shifts in China’s Monetary Adjustment Methods During the Era of High-quality Economic Growth” (经济高质量发展阶段的中国货币调控方式转型).

“The Chinese economy has already shifted from a high-speed growth phase to a high-quality growth phase, and Chinese monetary policy adjustment methods should shift from a focus on monetary quantity adjustments to monetary price adjustments.

“With regard to monetary adjustment theory, a comprehensive review of international experience and China’s indirect monetary adjustment shift clearly indicates that following an acceleration in and fundamental completion of the marketisation of interest rates, because of financial innovation and flourishing growth in the removal of intermediaries, the effectiveness of China’s traditional quantitative-based monetary adjustments has steadily declined, and a shift towards price-based adjustment methods is urgently needed.

“Disputes in western nations and amongst western economists with regard to monetary quantity and monetary price adjustments are all from the perspective of relatively mature and stable economic systems, yet China remains a non-developed economy that is in the process of transition.

“Its economic structure is also unstable, and its choice of monetary policy adjustment and model transition must service the shift towards high-quality growth.”

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