PBOC Commits to Stable Monetary Policy as Enterprise Loan Interest Rates Drop to Record Low, Commercial Lenders See First Profit Decline Since 2003

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The People’s Bank of China (PBOC) has reiterated its commitment to stable monetary policy following the release of key financial data for the first quarter of 2021.

“Since the start of the year monetary policy has made stability the top priority, and loans have maintained rational growth,” said Sun Guofeng (孙国峰), head of PBOC’s monetary policy department, at a press conference held on 12 April for the interpretation of first quarter financial data.

“The next step will be for China’s monetary policy to focus on itself, to uphold regular monetary policy, make stability the top priority, and treasure the space for regular monetary policy.

“At the same time we will focus closely on changes in international economic and financial conditions, strengthen the flexibility of the renminbi exchange rate, and undertake international macroeconomic adjustments with ourselves as the focus, to effectively maintain a leading global position in macro-economic policy.

As of the end of March the M2 money supply in China was 9.4% ahead of the same period last year, while total social financing (TSF) had grown 12.3%, for accelerations of 0.8 percentage points compared to the end of March 2020.

In the first quarter Chinese financial institutions extended new loans of 7.67 trillion yuan, 574.1 billion yuan ahead of the figure for the same period last year.

In February the interest rate for enterprise loans was 4.56%, for a decline of 0.76 percentage points compared to July 2019 when system reforms were introduced, and the lowest level on record.

At the end of February the financial inclusion micro and small-loan balance was 35.5% ahead of the same period last year, while the manufacturing sector medium and long-term loan balance had grown by 38.8%.

The decline in enterprise loan rates and the rise in financial inclusion and manufacturing lending arrives following a push from regulators for Chinese banks to “sacrifice profits” in order to reduce financing costs for the real economy.

Ruan Jianhong (阮健弘), head of PBOC’s statistical department, said that in 2020 Chinese commercial banks had seen profit declines of 2.7%, for the first year of negative growth on record since 2003.

According to Ruan this was mainly due to reductions in interest rates to “transfer” profits to the real economy, with the net interest rate spread declining 10 basis points in 2020.

With regard to concerns about liquidity levels in April, Sun Guofeng said that some tightening was the result of the delayed scheduling of local government bonds, as well as sizeable tax payments this month. Sun pointed out however that fiscal expenditures had been considerable at the end of the first quarter, serving to offset these impacts.

Sun issued the reminder that analysts should focus on seven-day repo rates and changes to the rates for medium-term lending facilities (MLF) when seeking to assess the direction of short-term interest rates, as opposed to “focusing excessively” on the volume of open market operations and liquidity in the banking system.

“The volume of open market operations will be flexibly adjusted based on multiple provisional factors as well as the market demand situation, and their changes are not fully reflective of market interest rate trends, nor do they reflects trends in central bank policy rates,” said Sun.

“When observing market rates, focus on the weighted average value of the seven-day repurchase rate for depository institutions (DR007) and its average value within a given timeframe, instead of rates for the transactions of individual institutions or rates at a given time point that can be disrupted by short-term factors.”

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