Caixin Weekly | Further Upgrades in the Monetary Policy Framework (AI Translation)
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文｜财新周刊 王石玉 刘冉
By Caixin Weekly's Wang Shiyu and Liu Ran
文｜财新周刊 王石玉 刘冉
By Caixin Weekly's Wang Shiyu and Liu Ran
近来金融市场感受到了一些变化：货币供应量增速创新低、新增社会融资规模罕见负增长，但并未带来降息降准；贷款定价的基准——贷款市场报价利率（LPR）三次与中期借贷便利（MLF）利率“脱钩”而单独下调。种种迹象表明，过去几年相对稳定的货币政策调控逻辑正在发生变化。
Recently, the financial market has experienced some changes: the growth rate of money supply has hit a record low, the new social financing scale has seen a rare negative growth, yet this has not triggered a reduction in interest rates or required reserve ratios. The Loan Prime Rate (LPR), which serves as the pricing benchmark for loans, has been decoupled from the Medium-term Lending Facility (MLF) rate three times and adjusted downward independently. These signs suggest that the relatively stable monetary policy regulation logic of the past few years is undergoing a shift.
2024年6月19日，中国央行行长潘功胜在第十五届陆家嘴论坛上，阐述了关于未来货币政策框架演进的几点思考，回应了市场关注。
On June 19, 2024, at the 15th Lujiazui Forum, People's Bank of China Governor Pan Gongsheng elaborated on several considerations regarding the evolution of the future monetary policy framework, addressing market concerns.
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- The current monetary policy in China is shifting from quantity-based to price-based regulation, emphasizing interest rates over monetary supply.
- Significant recent policy changes include the decoupling of the Loan Prime Rate (LPR) from the Medium-term Lending Facility (MLF) and plans to refine monetary policy tools, including treasury bond trading.
- The People's Bank of China aims to enhance policy transparency and gradually optimize intermediate variables while reducing the focus on quantitative growth indicators.
The financial market has recently witnessed changes such as a record low in money supply growth and rare negative growth in social financing scale, yet without a reduction in interest rates or required reserve ratios. The Loan Prime Rate (LPR) has decoupled from the Medium-term Lending Facility (MLF) rate and adjusted downward independently, indicating a shift in China’s monetary policy regulation logic [para. 1][para. 2].
On June 19, 2024, Pan Gongsheng, Governor of the People's Bank of China (PBOC), elaborated on the future monetary policy framework at the Lujiazui Forum, suggesting optimization of intermediate variables for monetary policy, emphasizing interest rate regulation over quantitative targets [para. 2][para. 3].
China's monetary policy framework has evolved, moving from loan quota instructions in 1984 to abolishing credit scale control in 1998, prioritizing money supply, and transitioning towards price-based regulation since 2018 [para. 4]. The quantitative regulation targets include broad money supply (M2) and total social financing, balancing financial volume with economic growth and price levels. China’s interest rate framework followed a transmission path of "policy rates - benchmark rates - market rates" after the 2015 interest rate marketization reform [para. 5].
Focus has increasingly shifted towards price targets. For instance, a key liquidity indicator identified in 2019 was the 7-day interbank pledged repo rate (DR007). Further enhancement of the market-based interest rate regulation mechanism could involve explicitly designating a short-term operational interest rate as the main policy rate [para. 6]. Shifting from quantity- to price-based control is seen as a mid-term trend, needing optimization of current framework details [para. 7].
The statistical focus currently is on M1 and M2. For example, M2 stood at 301.8 trillion yuan with a growth rate of 7% by May 2024, while M1 saw a decline of -4.2% year-on-year. Market expectations are supported by transparent policy communication as the PBOC aims for enhancing monetary policy transparency and credible communication mechanisms [para. 8][para. 9].
The Total Social Financing (TSF) scale, another key quantitative indicator, was at RMB 391.8 trillion in May 2024 but with a historic low growth rate of 8.4%. The practicality of quantitative targets is questioned due to their inadequate representation of economic vitality amidst high financial stock levels [para. 10][para. 11].
For price regulation, China’s mechanism has guided money market rates via central bank reverse repo and further medium-term rates through MLF, with interest rates on policy tools such as MLF playing a crucial role in the transmission mechanism. Nonetheless, recent decouplings between MLF and actual interest rates indicate possible inefficiencies, hinting towards a future where the PBOC may emphasize shorter-term rates [para. 12][para. 13][para. 14].
Improving interest rate transmission involves narrowing the interest rate corridor to stabilize market expectations effectively. The central bank has explored using the Standing Lending Facility (SLF) rate as the upper limit and the excess reserve rate as the lower limit, aiming for a smoother policy-target relationship [para. 15][para. 16][para. 17].
The PBOC may also start incorporating secondary market government bond transactions into its monetary policy toolkit, potentially using both buy and sell actions to manage liquidity and market prices effectively. Such changes may align with increased transparency and structured communication, thereby solidifying expectations about monetary policy directions and optimizing economic decisions [para. 18][para. 19][para. 20].
[B]Yi-Ning Xia also contributed to this article.[/B] [para. 1][para. 2].
- 1984：
- China's monetary policy regulation primarily relied on loan quota instructions.
- October 1994：
- The 'Interim Measures for the Statistics and Publication of Money Supply from the People's Bank of China' was issued.
- 1998：
- The People's Bank of China abolished credit scale control and made money supply the main intermediate variable of monetary policy.
- 2014：
- China began exploring the use of an interest rate corridor to regulate short-term interest rates.
- 2015：
- China's interest rate marketization reform was completed.
- 2018：
- Former PBOC Governor Yi Gang stated that China is transitioning from quantity-based regulation to price-based regulation.
- April 2019：
- Deputy Governor Liu Guoqiang emphasized the principle of 'appropriate tightness' for monetary policy, using the interbank repo rate as an indicator.
- December 2021：
- The 1-year LPR was reduced by 5 basis points even though the MLF rate was not adjusted.
- May 2022：
- The LPR for loans over five years was independently lowered by 15 basis points while the MLF rate remained unchanged.
- August 2023：
- The PBOC reduced the 7-day reverse repo rate by 10 basis points to 1.8%.
- January 2024：
- The yield on the 10-year government bond fell below 2.5%.
- February 2024：
- The LPR for loans over five years was reduced by 25 basis points to 3.95%.
- End of May 2024：
- M2 balance stood at 301.8 trillion yuan with a year-on-year growth rate of 7% and M1 balance was 64.7 trillion yuan with a year-on-year growth rate of -4.2%.
- End of May 2024：
- Total social financing balance stood at RMB 391.8 trillion, with a year-on-year growth rate of 8.4%.
- June 19, 2024：
- People's Bank of China Governor Pan Gongsheng spoke at the 15th Lujiazui Forum.
- End of 2009：
- The initial values from which the M1 and M2 balances were compared.
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