China's central bank fires "ten arrows" at Trump-induced economic uncertainty
Beijing wants monetary policy to drive technological innovation and domestic consumption growth.
Pan Gongsheng (潘功胜), the governor of the People’s Bank of China (PBOC) - being the China’s central bank - said the authority would implement 10 key monetary policy measures in the wake of the economic uncertainty unleashed by Donald Trump’s Liberation Day tariffs.
The measures run the gamut of monetary policy tools employed by the Chinese central bank, falling under the three categories of:
Quantitative policy.
Price policy.
Structured policy.
Pan made the announcement at a press conference held by China’s State Council on 7 May, concerning Beijing’s “raft of financial policies to support stable markets and stable expectations” (一揽子金融政策支持稳市场稳预期).
Quantitative policy
PBOC’s quantitative policy primarily involves the use of cuts to the required reserve ratio (RRR)
The RRR determines the volume of deposits that commercial banks need to stow with the central bank.
The higher the ratio, the fewer loans banks can make, while the lower it is, the greater their license to extend credit.
In cutting the RRR, PBOC’s goal is expand the supply of medium and long-term liquidity, helping to keep it in an “ample” condition.
Out of the 10 measures outlined, two fall under the category of quantitative policy
A 0.5 percentage point cut to the RRR, which is expected to unleash around 1 trillion yuan in long-term liquidity for the market.
Targeted cuts to the RRRs for specific types of financial companies, with the goal of increasing purchases of durable goods. According to Pan, “improvements to the required reserve system” will see the ratio cut from 5% to 0% for auto finance companies and financial leasing companies.
Pricing policy
Pricing policy primarily involves the use of reductions to PBOC’s policy rates.
These are the interest rates for the 7-day reverse repos and medium-term lending facilities (MLF) that serve as the main tools for PBOC’s open market operations (OMO).
It also refers to adjustments to the interest rates for PBOC’s structured monetary policy tools and loans made by China’s provident funds.
Pan said three of PBOC’s ten measures would involve the use of monetary policy pricing.
A 0.1 percentage point reduction to PBOC’s policy rate. This in practice means reducing the rate for PBOC’s 7-day reverse repo from 1.5% to 1.4%. PBOC expects the move to drive a 0.1 percentage fall in the Loan Prime Rate (LPR), which is the benchmark rate for the Chinese banking sector.
A larger 0.25 percentage points reduction to the rates for structured monetary policy tools, that PBOC uses to channel credit to priority sectors of the economy. PBOC will reduce the rate for re-loans to support agriculture and small enterprise from 1.75% to 1.5%, and the rate for the pledged supplementary lending (PSL) facility from 2.25% to 2%.
The rate on personal home loans made by China’s provident fund will also be reduced by 0.25%. This will bring the rate on first-home loans for terms of more than five years down from 2.85% to 2.6%, with other terms set to see corresponding reductions.
Structured policy
Structured monetary policy measures will involve “improvements” to the existing structured monetary policy tools that PBOC uses to direct credit to specific parts of the Chinese economy.
It will also see the creation of new policy tools, with the specific goals of supporting scientific and technological innovation, expanding consumption and shoring up financial access.
Pan highlighted a total of five measures under the remit of structured monetary policy.
A 300 billion yuan increase in the re-loan quota for science and technology innovations and technological upgrades. This will lift the quota from 500 billion yuan to 800 billion yuan.
The launch of a 500 billion yuan “services consumption and aged-care re-loan", to guide commercial banks to expand lending support in these areas.
Increasing the re-loan quota for supporting agriculture and small enterprise by 300 billion yuan, in tandem with reductions to re-loan interest rates. The goal is to drive banks to expand lending to micro and small-enterprises involved with the agricultural sector, as well as to private enterprise.
Optimisation of two existing monetary policy tools for supporting China’s capital markets, should they be further buffeted by global trade disputes. PBOC will combine the 500 billion yuan swap facility for securities funds and insurance companies with the 300 billion yuan re-loan for collateralised share buybacks, for a total sum of 800 billion yuan.
The launch of measures to jointly share bond risk, in order to support Chinese scientific and technological innovation. The Chinese central bank will provide funds via low-cost re-loans for the purchase of “tech innovation bonds”. PBOC will also cooperate with local governments and credit agencies to share the risk of losses from bond defaults, via measures including joint guarantees. According to Pan, this will enable tech companies and equity investment companies to issue low-cost, long-term bonds to fund innovation.