Chinese Central Bank Expected to Further Cut Reserve Ratio in 2023, Make Greater Use of Structured Monetary Policy Tools

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Domestic analysts expect the People’s Bank of China (PBOC) to continue to maintain comparatively loose monetary policy in 2023, as Beijing continues to grapple with the economic headwinds created by geopolitical tensions and the Covid pandemic.

PBOC deputy-governor Liu Guoqiang (刘国强) recently stated that in 2023 the “overall quantity of monetary policy will not be smaller than [in 2022], and if required will further increase in intensity.”

“The quantity must be sufficient, which encompasses better satisfying the needs of the real economy, as well as maintaining rationally ample liquidity on the financial market and the rational elasticity of the price of funds, while preventing major fluctuations.”

Wen Bin (温彬), chief economist with China Minsheng Bank, said that further stabilisation of economic growth would remain the chief consideration for monetary policy in 2023.

Wen expects PBOC to expand guidance of the demand for money, and the use of policy tools including cuts to the reserve ratio and interest rates to “vigorously” drive the use of credit.

He further points out that in 2023 economic growth will require greater fiscal support, while raising the fiscal deficit will in turn entail support in the form of low-cost bonds issues and the maintenance of loose monetary policy.

For this reason, Wen forecasts two cuts to the reserve ratio in 2023, which he sees as likely to arrive in the second and fourth quarters.

Ming Ming (明明), chief economist with CITIC Securities, said that in 2023 Chinese monetary policy will extend its basic theme of stability, while making greater use of structured monetary tools to guide and direct credit extension.

“Since 2018, there has been constant innovation in the use of structured monetary tools, against a background of increasingly pronounced structural problems in the macro-economy,” Ming said to Diyi Caijing.

“The key target of monetary policy has shifted towards balancing loose credit and stabilisation of leverage, or balancing stable growth and risk prevention.

“Monetary policy is in greater need of precision and directness, and with the need to preserve space for normal monetary policy, structured monetary tools have gradually become more diverse in terms of type and function.

“Since 2018, there have been pronounced results from the use of structured monetary policy tools to support key points and weak areas, but structured monetary policy cannot become the main force for the loosening of credit.

“The expansion of total social credit still entails reliance upon quantitive policy tools. In 2023, quantitive policy tools will be indispensable, but structured monetary policy tools will be needed to support the recovery of weak linkages.”

China’s central economic work conference held at the end of 2022 previously called for guiding financial institutions to expand their intensity of support for micro-and-small enterprises, tech innovation and green development.

Wen Bin also forecasts greater use of targeted monetary policy in 2023, in coordination with the use of fiscal and industrial policy to stabilise growth.

In addition to developmental financial tools, emissions reductions tools, and instruments to support financing of tech innovation and micro-and-small enterprises, structured monetary policy tools could also expand to cover areas such as consumption, new urban residents and energy security.

The use of re-lending tools could expand to include joint-stock banks and municipal commercial banks in addition to the big state-owned banks and rural lenders. The 1.75% re-loan rate is expected by Wento become the “new normal”, partially replacing the rates for medium-term lending facilities as the pricing anchor for the marginal cost of debt for commercial banks, and helping to drive down liabilities costs for lenders.