Wen Bin ( 温彬), chief economist for joint-stock lender China Minsheng Bank, expects the People’s Bank of China (PBOC) to maintain the use of targeted monetary policy in a bid to drive domestic consumption and investment, as policymakers remain less than optimistic about global economic conditions.
In his analysis of the latest “2022 Q4 Chinese Monetary Policy Execution Report” (2022年第四季度中国货币政策执行报告) released by PBOC on 24 February, Wen said that the monetary authority will make cautious use of policy tools to bolster key areas of the economy as the impacts of the Covid pandemic gradually subside.
“Overall, the central bank’s research and assessment the global economy is still not optimistic, and it has greater confidence in the domestic economy,” Wen wrote in a Sina post.
“However, uncertainties in areas such as the conversion of savings to consumption, real estate, and local government fiscal conditions are still pronounced, and monetary policy has not yet reached the stage of adjustment.
“Boosting confidence and expanding domestic demand are still the chief themes at present, while promoting consumption, expanding investment, and stabilizing the real estate market are the main focus of policies.
“However, as the impact of the epidemic subsides, the economic recovery improves, and the financing environment changes, room for further easing of monetary policy will gradually narrow.”
Wen Bin highlighted seven key takeaways from the latest monetary policy execution report released by PBOC:
- General conditions: Lack of optimism about the global economy, general recovery in the domestic economy despite hidden concerns. “With regard to the global economy, the central bank continues to emphasize ‘increasing downward pressure on the global economy,’ arguing that ‘in addition to geopolitical conflicts, energy shortages, and high inflation, monetary policy tightening also has an impact on the economic downturn.’ It stressed that ‘the rapid acceleration of interest rate tightening by major developed economies has a lagging and cumulative effect, and the drag on global economic growth may exceed expectations.’ Financial risks in some areas may be exposed faster, and a new form of ‘climate protectionism’ warrants vigilance.”
- Prices: Concerns about inflation have eased, and the anchor of monetary policy is still the real economy. “Compared with the third quarter, the central bank’s concerns about inflation have cooled down, the overall phrasing is more moderate, and its constraints on monetary policy have further weakened. The anchor of monetary policy is still the real economy.”
- Monetary policy: Targeted and forceful expansion of domestic demand, promotion of consumption and expansion of investment are the main direction of efforts. “The tone of the monetary policy has not changed, and extends the Central Economic Work Conference’s requirement that ‘prudent monetary policy should be targeted and forceful.’ However, highlighting a ‘focus on supporting the expansion of domestic demand and providing stronger support for the real economy’ has become the direction for the implementation of policy which is ‘targeted and forceful.'”
- Credit policy: Structural tools will strengthen guidance and focus on the stability and sustainability of credit growth. “The position of structural monetary policy tools is clearly at the forefront, with a focus on ‘key points, rationality and moderation, and advancing and retreating.’ Compared with the third quarter, the position of structural monetary policy tools in the report has clearly advanced. In 2023, structural monetary policy tools will continue to work with fiscal and industrial policies to stabilize growth, and expand the scope of ‘precision drip irrigation.’ Structural monetary policy tools will become an important force in promoting loose credit in the future. They will continue to expand in areas such as policy-based development financial tools, carbon emission reduction support tools, technological innovation, and financial inclusion for small and micro businesses.”
- Liquidity: PBOC will guide the market interest rate to fluctuate around the policy interest rate, while liquidity will be more reasonable and balanced. “Compared with the third quarter report, the phrase ‘guiding the market interest rate to fluctuate around the policy interest rate’ was added this time. This expression last appeared in the first quarter of 2022. Its return means that follow-up liquidity will move towards a more balanced, reasonable and sufficient condition. After the impact of the epidemic subsides, the long-term pattern of market interest rates being lower than the policy interest rate may come to an end.”
- Loan rates: The interest rate of corporate loans has fallen below 4% for the first time, and room for interest rate cuts has further narrowed. “Loan rates have continued to decline, hitting their lowest levels on record. In 2022, under conditions of decline policy interest rates, an ‘asset drought’ and efforts to spur credit demand, the one-year and five-year loan prime rates (LPRs) fell byby 15bp and 35bp, respectively, for a major increase in the size of decline. Correspondingly, the interest rates for various types of new lending continued to decline, and their declines were far greater than those for the LPR. The central bank continues to propose ‘promoting the reduction of corporate financing and personal consumption credit costs.’ Given that the high-quality corporate loan interest rate is already low, the first-home loan interest rate in some areas has dropped sharply, and net margins for banks have narrowed to a historically low, the room for further interest rate cuts in future has further further. To achieve a comprehensive interest rate cut, it is necessary to start with the reduction of deposit interest rates and expand room. In addition, targeted interest rate cuts for some industries may be an important policy orientation, and appropriate adjustments to existing high-interest rate loans are also a possibility.”
- Real estate: An overall positive tone – intensified policy and coordinated exertion are still the key themes. “With regard to real estate, the report continues the spirit of various meetings held last year. On the one hand, it still emphasizes that ‘housing is for occupation, not speculation, and real estate should not be used as a means to stimulate the economy in the short-term.’ In addition, it also stresses ‘firmly and effectively ensuring the delivery of property, satisfying the rational financing needs of the industry, promoting industry restructuring and mergers and acquisitions, improving the balance sheets of high-quality leading real estate companies, and implementing locally tailored policies to support inelastic housing demand and improved housing demand.’ The overall tone is positive, and the focus on resolving the current real estate crisis is still high. Loosening real estate policies and coordinated policy efforts are still important themes.”