PBOC’s Q3 monetary policy report highlights greater coordination with fiscal policy


The People’s Bank of China (PBOC), being the Chinese central bank, has just released its latest monetary policy execution report, sending key signals as to future policy settings and interest rate decisions.

On 27 November, PBOC released the “2023 Q3 China Monetary Policy Execution Report” (2023年第三季度中国货币政策执行报告) – a key document for the Chinese central bank to convey its intentions to the broader market. 

The latest report called for:

  • Steady monetary policy [which] must be precise and vigorous.
  • Greater focus on effectively performing cross-cyclical and counter-cyclical adjustments.
  • Making full use of the monetary policy toolkit, and
  • Endeavouring to operate an excellent monetary and financial environment.

Monetary and fiscal coordination could mean more rate cuts

PBOC highlights the ability for China to coordinate monetary and fiscal policy, given that both the central bank and the Ministry of Finance fall under the aegis of the State Council – the highest authority in the Chinese government. 

This arrangement distinguishes the Chinese system from that of most OECD economies, where central banks enjoy considerable independence from elected officials, in order to prevent use of expansionary monetary policy to prime the economy in the run-up to elections. 

The Q3 monetary policy execution report contains a special column entitled “actively strengthening the coordination of monetary policy with fiscal policy.” 

Zhang Jun (章俊), chief economist from China Galaxy Securities, points out that China is currently making heavy use of fiscal policy as a counter-cyclical tool, with the record issuance of treasury bonds and local government bonds, as well as special refinancing notes to deal with local government debt. 

These large-scale debt issues have put heavy pressure on China’s money markets, contributing to a surge in the Shanghai Interbank Offered Rate (Shibor) – the cost of borrowing on China’s interbank market, at the start of November. 

Zhang Jun points to the possibility of further cuts to interest rates by PBOC in order to alleviate liquidity issues. 

“All of [the debt issues] require the maintenance of ample liquidity,” Zhang writes. 

“Counter-cyclical adjustments are anchored to the natural interest rate, and at present there is still room for adjustments to the policy rate to stabilise economic recovery, and reduce the pressures of government debt.”

Economic commentator Ren Zeping (任泽平) also points to the possibility of cuts to the required reserve ratio as a means of shoring up liquidity in the Chinese banking system. 

“[The report] highlights maintaining rationally ample liquidity, coordination between monetary and fiscal policy, and flattening out the volatility of funds,” Ren writes.

“At the end of this year or the start of next year there is still a good chance that the central bank will reduce the reserve ratio to support debt issues.”

Rate cuts and increases to China’s money supply would be abetted by tepid inflation. 

“The central bank has judged that in the short-term the prices of goods will remain low,” Ren points out. 

Economic growth deemed uncertain

Chinese analysts say PBOC’s mention of greater focus on “cross-cyclical and counter-cyclical adjustment” shows the central bank’s determination to ensure that growth remains on an even keel in the near-term.

Wang Qing (王青), chief macro-analyst at Golden Credit Rating, said that improvements to economic readings in the third quarter meant that China is likely to fulfil its full-year growth target of around 5%. 

Wang nonetheless points out that “the foundations for stablisation and improvement of the economy remain unstable at present, and the real esate sector in particular remains in a process of adjustment. 

“In future, in order to drive the economy to return towards the path of normalisation, monetary policy will maintain the trend of supporting growth, and continue to exert vigour.”

Wen Bin (温彬), chief economist at China Minsheng Bank, said to Securities Daily that PBOC is currently focused more on “short-term economic growth and long-term structural optimisation.”

Use of structured monetary policy tools to channel credit

The Q3 report debuted use of the phrase “accurately seizing the laws and new features of the supply and demand of money and credit, and strengthening adjustment of both aggregate supply and structure.”

Wang Qing said the phrase means that PBOC will no longer “one-sidedly focus on growth in credit, but instead focus on targeted provision and invigourating existing funds.”

The report also highlights the role of PBOC’s structured monetary policy tools in channelling credit to specific areas of the economy.

According to the report, these tools will be used to “direct more financial resources towards scientific and technological innovation, advanced manufacturing, green development and micro-small and medium-sized enterprises.”

The report highlights efforts to “accelerate the cultivation of new drivers and new advantages” across the “five major chapters” of:

  • Tech finance.
  • Green finance. 
  • Financial inclusion.
  • Pension finance.
  • Digital finance.

Jie Yunliang (解运亮), chief macro-analyst with Cinda Securities, said the move is consistent with efforts by regulators to drive the Chinese financial system to “service the real economy.”