PBOC’s Monetary Policy Committee Says Payments of Profits to Treasury More Important than Reserve Cuts

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A key figure in the Chinese central bank’s monetary policy team has stressed the role of the transfer of its profits to fiscal authorities as part of overall economic policy coordination.

“Over 1 trillion yuan in realised profits will be transferred to fiscal (authorities) this year, equal to the release of 1.1 trillion yuan in base money,” said Wang Yiming (王一鸣), a member of the Monetary Policy Committee of the People’s Bank of China (PBOC), to state-owned media on 19 April.

“This embodies the coordination and cooperation between monetary policy and fiscal policy, and is of benefit to invigorating the economy and stabilising the macro-economy.”

Wang’s remarks arrived just after PBOC announced that as of the middle of March it had transferred around 600 billion yuan in profits to China’s central fiscal authorities, to be used primarily for tax credits and local government transfer payments.

According to Wang this transfer is equal to the release of around 600 billion yuan in base money, as well as a reduction in the reserve ratio of around 0.25 basis points.

“The results of the central bank’s transfer of profits trump reserve ratio reductions, and is of benefit to invigorating effective demand,” said Wang.

“The transfer of profits by the central bank not only will release over 1 trillion yuan in base money, it will also trigger growth in the M2 money supply of around 0.5 percentage points.

“After the profits transferred by the central bank are spent by fiscal authorities, they will directly enter the hands of enterprises and households, improving the balance sheets of the household and enterprise sectors, and invigorating effective demand.

“Reserve reductions increase the usable funds of commercial banks, but are not guaranteed to bring about lending, while profit transfers by the central bank directly reach market entities.”

In 2022 PBOC plans to transfer over 1.1 trillion yuan in profits to fiscal authorities, with a front-loaded transfer schedule based upon tax credit needs.

“[This] will be coordinated with monetary policy operations, for the vigorous maintenance of rationally ample liquidity,” said Wang.