China's central bank commits to credit guidance for tech innovation and consumption

Our briefing for Thursday, 27 March, 2025.

Our briefing on critical macroeconomic and financial themes in China as of Thursday, 27 March, 2025:

• The People’s Bank of China (PBOC) - the Chinese central bank, advances changes to its interest rate system and open market operations, in a bid to bring them more in line with global practices as well as reduce the squeeze on net interest margins for lenders.

• The Chinese central bank also just held its first quarter monetary policy execution meeting, where it signalled ongoing efforts to support the value of asset markets, as well as use credit guidance in the form of structured money policy tools to channel more credit to tech innovation.

• Beijing commits to a “comprehensive package of policies” to drive consumption growth in 2025, including a push to raise income levels.

• He Lifeng, vice-premier and Politburo member, meets with US corporate heads and commits to further opening of the Chinese economy.

• Wang Huimin, one of the top disciplinary officials at China’s securities regulator, has been placed under investigation by central government authorities.

China's central bank changes its policy rate system, reduces pressure on commercial banks

On 24 March, PBOC announced that it would change standard operating procedures for its medium-term lending facilities (MLF) - one of its two main open market operations tools alongside the 7-day reverse repo.

The central bank said that its MLF auctions will in future make use of an interest rate bidding system with multiple winning price bids.

Industry observers said to China's state-owned media that the move serves to further diminish the significance of the MLF rate as a policy rate employed by the central bank to influence other interest rates.

The reduction in the role of the MLF rate is part of broader reform of the Chinese interest rate system and monetary policy practices.

The MLF has historically served the role of defining the Chinese central bank's medium-term policy rate.

The central bank has recently sought to reform and simplify its monetary policy framework, on the grounds that there are too many policy rates that share complex and confusing relationships.

In a speech delivered on 19 June last year at the Lujiazui Conference in Shanghai, Chinese central bank governor Pan Gongsheng said that the monetary authority would move towards using the 7-day reverse repo rate as its main policy rate, reducing the significance of other key policy rates.

The implementation of multiple winning price bids for the MLF serves to further bring this plan to fruition, and convert the instrument into just a liquidity injection tool.

Sources close to the Chinese central bank said the move will also help to reduce the liabilities costs for commercial banks, helping to ease net interest margin pressures and strengthen their ability to support the real economy.

MLF bids usually make reference to market-based interbank financing costs. Multiple winning bids will "better reflect the diversified demand for funds amongst financial institutions, and employ their market-based sovereign pricing capability."

At present, the rate on interbank certificates of deposit issued by the big state-owned banks and joint-stock banks in China stands at around 1.95%, and slightly higher for smaller lenders.

On the date of the announcement, the Chinese central bank said that on 25 March it would undertake 450 billion yuan in one-year MLF operations.

This translate into a net injection of 63 billion yuan in March, given the maturation of 387 billion yuan in MLF that month, for the first net injection via MLF since July 2024.

Industry observers said the injections are part of China's current "moderately loose" monetary policy stance.

The Chinese central bank commits to support for tech innovation and stock markets at Q1 monetary policy meeting

PBOC holds monetary policy meetings on a quarterly basis to issue key policy signals on its upcoming decisions.

It held its first quarter monetary policy meeting for 2025 on 18 March.

State-owned media has highlighted three key signals from the Chinese central bank arising from the meeting.

The first is that the Chinese central bank will keep monetary policy at “moderately loose” levels - a phrase last used in the aftermath of the Global Financial Crisis, and redeployed at last year’s Central Economic Work Conference.

The goal is to reduce funding costs for enterprises and households.

The Chinese central bank’s Q1 monetary policy meeting said it would “reduce the reserve ratio and interest rates when opportune, based on domestic and external economic and financial conditions, and the financial market operating situation.”

“Opportune reductions to the reserve ratio and interest rates” are considered by observers to be significant of “moderately loose” monetary policy that was last implemented at scale 14 years ago.

At present the average required reserve ratio for Chinese financial institutions stands at 6.6%, which policymakers believe leaves them with ample room for further reductions.

The meeting also called for “driving further reductions in overall social financing costs,” presaging greater support for the real economy, with an especial focus on Chinese enterprises and households.

Secondly, the Chinese central bank will continue to make heavy use of credit guidance in the form of “structured monetary policy tools,” to step up support for technological innovation, domestic consumption and foreign trade.

The Chinese central bank called for “optimising re-loan policies for science and tech innovation and technological improvements, and researching and designing new structured monetary policy tools.”

The focus is on “supporting the financing of scientific and technological innovation, expediting consumption and stabilising foreign trade.”

Industry observers believe that the Chinese central bank will reduce rates on structured monetary policy tools first, before implementing cuts to interest rates across the board.

These partial cuts to rates for structured monetary policy tools can better channel credit to key areas of support, including Beijing’s “five major chapters” of priority financing.

Third, the Chinese central bank committed to supporting the stabilisation of financial markets, including the stock market, forex markets and debt markets.

Stock market support, along with support for the property market, is a key part of Beijing’s efforts to drive consumption growth in 2025 via wealth effects for Chinese households.

The Q1 monetary policy meeting called for “making effective use of swap facilities for securities, investment fund and insurance companies, and re-loans for share buy backs or increasing shareholdings.”

Both programs have been in effect for five months, with around 400 A-share listed companies unveiling share buy-back plans or plans to increase equity holdings of key shareholders.

China will use comprehensive package of policies to expand consumption: Han Wenxiu

Han Wenxiu (韩文秀), a senior official from China's Central Financial and Economic Commission office, said Beijing will "strengthen consumption capability, spur economic growth, and increase rural and urban incomes on the foundation of rising labour productivity."

Han made the remarks on 23 March at the China Development Forum held in Beijing.

"[We will] optimise the income allocation structure, raise the share of household income in national income, and enable consumers to have the money for consumption.

"At the same time, we must expand services consumption.

"China will comprehensively implement measures to expand consumption, and continually form conditions for the reciprocal reinforcement of high quality development and high quality living standards."

Beijing tells US corporate heads that China will drive high-level opening and welcome foreign investment

On 23 March He Lifeng (何立峰), vice-premier and member of the Politburo, met with the heads of leading corporations including Apple, Pfizer, Brookfield, Medtronic, Mastercard, Eli Lilly, Cargill and Corning.

During the meeting, He committed to the further opening up of the Chinese economy to overseas investors.

"China will expand high-level foreign opening, continue to optimise the commercial environment, and welcome multinational corporations to expand investment in China to share development opportunities."

China's securities disciplinary chief Wang Huimin placed under investigation.

On 21 March, China's Central Disciplinary Commission announced that Wang Huimin (王会民) had been placed under investigation for suspected "severe disciplinary and legal breaches."

Wang was formerly one of the senior-most official at the China Securities Regulatory Commission (CSRC), serving as a member of CSRC's party committee, as well as head of its disciplinary supervision and inspection team.

66-year old Wang was born in Gansu province, and became party secretary of the Xinjiang branch of China Construction Bank - one of the big six state-owned banks - in April 1998.

Following a lengthy career in Xinjiang, in January 2014 Wang became a member of CSRC's party committee and the secretary of its disciplinary commission.