What Are The New Highlights Of China'S Monetary Policy?

We systematically reviewed the central bank monetary policy The scope and evolution of objectives, policy tools and transmission mechanism, and the differences between the PBOC and other major central banks in the world (including the Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England) in these aspects.

　　 Our conclusion:

1) Like other central banks, the People's Bank of China has set multiple goals. The priority of these policy objectives will be adjusted from time to time, and the People's Bank of China will use a variety of policy tools to achieve these objectives.

2) In view of structural reform and the slowdown of capital inflows, the People's Bank of China tends to use targeted regulatory policies to inject liquidity into the financial system rather than traditional policy tools (such as interest rate cuts).

3) We expect China Central Bank It will be more flexible to use targeted easing tools in combination with measures such as interest rate reduction and reserve ratio reduction to ensure macroeconomic stability and promote structural balance.

In the short term, the People's Bank of China may still stay at the forefront of the global central bank's fight against "low inflation".

As time goes by, we believe that the People's Bank of China will gradually shift to a market-oriented price mechanism. Based on our analysis of the evolution of central banks in other countries, we believe that the People's Bank of China has a long way to go from "inflation targeting". China's financial reform and economic development enable the People's Bank of China to use more price based tools.

Monetary policy framework: what has changed? Why?

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Economic policy Government management It is an important tool for the country. In order to govern the country more efficiently, the central government of China used to manage local governments mainly by appointing government officials and issuing economic policies. Between economic overheating and recession, China's top decision-makers know how to switch their focus between monetary policy and fiscal policy. For decades, policymakers have found that monetary policy is more powerful in the process of tightening credit to curb inflation, and fiscal stimulus is the easiest way to boost economic growth.

However, many changes have taken place since 2013. The new government is more inclined to use monetary policy to achieve the policy goals of structural adjustment and counter cyclical adjustment at the same time. The most significant change is that after the economic growth slowed down in 2012, the new government decided to use monetary policy tools to reduce financing costs to promote investment growth, rather than using fiscal stimulus. In our view, this change is affected by the fiscal reform to straighten out the relationship between the central and local governments, and reflects the policy innovation to avoid repeating the mistakes of the four trillion yuan stimulus plan in 2008.

With the help of more innovative tools, the People's Bank of China has started monetary easing. Before the interest rate cut on November 21, the People's Bank of China had deliberately avoided introducing high-profile easing measures (such as an overall interest rate cut or a reserve ratio cut). The People's Bank of China, worried about being accused of excessive stimulus, has started to use a series of new targeted easing tools, which allows the central bank to better control the time, volume and capital flow of easing. The monetary authority seems to be in a dilemma between "comprehensive easing and stable growth" or "targeted easing and reform".

What has changed? What hasn't changed? China's monetary policy framework has always had some unique characteristics, but we need to understand the evolution history and background of the central bank's monetary policy, so as to better evaluate the monetary policy stance and make reasonable investment decisions. In this report, we systematically reviewed the scope and evolution of the central bank's monetary policy objectives, policy tools and transmission mechanism. At the same time, we try to put the policy framework of the People's Bank of China in the international environment and compare it with other major central banks in the world (including the Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England).

　　 Our conclusion:

1) Like other central banks, the People's Bank of China has set multiple goals. The priority of these policy objectives will be adjusted from time to time, and the People's Bank of China will use a variety of policy tools to achieve these objectives.

2) In view of structural reform and the slowdown of capital inflows, the People's Bank of China tends to use targeted regulatory policies to inject liquidity into the financial system rather than traditional policy tools (such as interest rate cuts).

3) We expect the People's Bank of China to be more flexible in using targeted easing tools in combination with interest rate cuts, reserve ratio cuts and other measures to ensure macroeconomic stability and promote structural balance.

The People's Bank of China has chosen to achieve multiple goals through targeted easing measures. These include stabilizing growth, promoting structural adjustment, and deleveraging. Although the economic growth rate declines, the potential economic growth rate decreases (which means that the output gap is smaller) and the employment pressure is smaller, which means that the central bank does not need to implement strong stimulus. At the same time, the reduction of capital inflows and the trend of balance of payments mean that the central bank must seek other ways to put base money.

Even so, targeted easing cannot replace interest rate cuts in reducing financing costs. Especially considering the opacity of such measures and the limitations of releasing policy signals. When combined with interest rate reduction, the purpose of monetary easing is very clear, which is to reduce the borrowing costs of the real economy, reduce the formation speed of non-performing loans, and then promote financial stability. At the same time, the combination of interest rate deregulation and fiscal reform can eliminate soft budget constraints (which is the key reason why state-owned enterprises and local governments are not sensitive to interest rates), thus improving the effectiveness of monetary policy transmission through interest rates.

We expect the People's Bank of China will gradually shift to a market-oriented price mechanism. Based on our analysis of the evolution of central banks in other countries, we believe that the People's Bank of China has a long way to go from "inflation targeting". China's financial reform and economic development will enable the People's Bank of China to use more price based tools.