1. The sound monetary policy has kept the value of the RMB stable
Currently, with international commodity prices soaring and inflation running high in developed economies, China has become a stabilizer for the world economy by keeping prices stable. In January 2022, the global commodity price index rose by 46 percent year on year; the US CPI increased by 7.5 percent from a year earlier, hitting a new high in four decades and surging above 5 percent for the ninth consecutive month; and the euro area saw a year-on-year CPI growth of 5.1 percent. By contrast, China has pursued a normal monetary policy to counter the COVID-19 impact, and has refrained from adopting indiscriminate stimulus measures while providing strong support for the real economy. As China’s monetary policy becomes more forward-looking, independent and stable, it has been more trustworthy to the public so that inflation expectations have remained stable. Notwithstanding high inflation in developed economies, prices in China have remained stable. With its annual CPI growth averaging 2.1 percent since 2018, China has achieved a better balance between growth, inflation and employment.
The RMB exchange rate has remained stable amid dramatic volatilities in the international financial markets. Since 2018, the RMB exchange rate has withstood severe external shocks and become significantly more flexible. It has played its role in macroeconomic management and as an automatic stabilizer for the balance of payments, remaining basically stable at an adaptive and equilibrium level. In 2019 and 2020, the RMB weakened beyond 7 against the US dollar for some time due to external shocks and later bounced back, driven by market forces. In 2021, the RMB strengthened slightly against the US dollar by 2.3 percent. From 2018 to 2021, the central parity rate of the RMB rose against the US dollar on 485 of the 973 trading days of China’s foreign exchange market, fell on 487 of them, and stayed flat on one trading day, which fully reflects two-way fluctuation. The stable RMB exchange rate not only represents the stable value of the RMB, but also plays a positive role in stabilizing economic and financial operations in Asia and even around the world.
These achievements are largely attributable to China’s sound monetary policy. In the face of the COVID-19 impact, China has pursued a normal monetary policy rather than rolling out quantitative easing or adopting zero or negative interest rates, and it has been firmly committed to keeping the value of the RMB stable. By doing so, China has avoided serious inflation that could hinder economic growth, and has created conditions and space for the adoption of appropriate measures when the economy is under downward pressure. As proved by practice, keeping the value of a currency stable is most fundamental in creating a favorable monetary and financial environment to keep economic indicators within a reasonable range.
2. The sound monetary policy has provided strong support for the real economy
In recent years, China’s monetary policy has better served the real economy. Following the general principle of pursuing progress while ensuring stability, the People’s Bank of China (PBC) has taken a systemic perspective, conducted cross-cycle policy design, and improved the incentive compatibility of mechanisms. It has adapted to the requirements of high-quality economic development by promoting supply-side efforts to make the growth of aggregates more stable and supporting high-quality development with appropriate monetary growth.
First, the PBC has kept the aggregates at an appropriate level. Acting ahead of the curve in the market, it has conducted liquidity adjustments in a forward-looking and targeted manner to ensure that liquidity in the banking system is always adequate at a reasonable level. Since 2018, the PBC has cut the reserve requirement ratio 12 times, with RMB10.3 trillion released in long-term funds, in order to support financial institutions increasing credit support for the real economy. It has improved the long-term mechanisms for central bank adjustments of the liquidity, capital and interest rate constraints on money supply so that the growth rates of M2 and aggregate financing to the real economy (AFRE) are basically in line with nominal GDP growth. With money supply well anchored, China has been able to keep up solid financial support for the real economy without adopting indiscriminate stimulus measures, and has effectively prevented macro financial risks. From 2018 to 2021, China saw an average M2 growth of 9 percent, which was roughly in line with the average nominal GDP growth of 8.3 percent in the same period.
Second, the PBC has taken steps to advance structural optimization. It has given play to the dual role of monetary policy tools in both aggregate and structural terms, guiding financial institutions to step up support for key fields and weak links, such as micro and small businesses (MSBs), agriculture, rural areas, farmers, green development, and the manufacturing sector. It has increased the quotas of central bank lending and central bank discounts and launched two market-based instruments targeting MSBs to support their financing via more sustainable means. Moreover, it has rolled out the carbon emissions reduction facility as well as targeted central bank lending for clean and efficient use of coal in order to promote green development and carbon reduction. At end-January 2022, inclusive MSB loans posted an outstanding amount of RMB19.7 trillion, 2.4 times the amount at the beginning of 2018, which provided support to 48.13 million MSBs, 2.3 times that recorded at the end of 2018. In 2021, the increase in inclusive MSB loans made up 20.7 percent of the total of new loans, a big rise from the 7.7 percent in 2018, while the inclusive MSB loans were issued at a weighted average interest rate of 4.93 percent, down by 0.22 percentage points from 2020 and by 1.38 percentage points from 2018.
Third, the PBC has guided lending rates to move downward. Reform has been carried out to improve the loan prime rate (LPR) formation mechanism in order to make lending rates more market-based and smooth the transmission mechanism of monetary policy. The PBC has established a central bank policy rate system, which takes the interest rates of open market operations (OMOs) as short-term policy rates, and the medium-term lending facility (MLF) rates as medium-term policy rates, and includes an interest rate corridor comprising the standing lending facility (SLF) rates and excess reserve rates. DR007, which stands for the 7-day repo rate for depository financial institutions in the interbank market, has been made the target for central bank management of short-term interest rates and been guided to move around policy rates. Furthermore, the PBC has optimized regulation over deposit rates. Under the self-regulatory framework for interest rate pricing, banks can now decide the upward floating band of their deposit rates by the new method of adding a few basis points to benchmark rates. The measure is aimed at stabilizing bank liability costs. Since the launch of the LPR reform in August 2019, the efficiency of China’s monetary policy transmission has been improved remarkably. Corporate loan rates fell by a cumulative 0.82 percentage points from 5.32 percent in July 2019 to 4.5 percent in January 2022, the lowest level since the start of reform and opening-up, which has been greatly helpful in easing the financing difficulties and reducing the financing costs for MSBs.
3. The sound monetary policy will create a favorable monetary and financial environment to keep the macroeconomic situation stable
Currently, China is faced with complex and fast-changing internal and external situations. Under the circumstances, there are both opportunities and challenges. Globally, with inflation running high, major developed economies have started tightening monetary policy at a faster pace, and geopolitical risks are on the rise, exacerbating uncertainties in the external environment. Domestically, despite lingering downward pressure in the short term, the Chinese economy is highly resilient so that its fundamentals for long-term growth will remain unchanged.
Going forward, under the guidance of Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era, the PBC will put into practice the guidelines of the Central Economic Work Conference. In line with the arrangements made by the Communist Party of China Central Committee and the State Council, it will pursue a sound monetary policy that is flexible and appropriate, and it will give top priority to stability while pursuing progress. To adapt to the changing situation and the requirements of high-quality economic development, the PBC will adjust the intensity, pace and focus of monetary policy in a flexible and appropriate manner. Moreover, it will guide financial institutions to vigorously increase credit supply, make the growth of credit aggregates more stable, and steadily optimize the credit structure, thereby bringing down the overall financing costs for businesses. China is able and well prepared to effectively cope with external shocks as well as internal downward pressure in the future. It will maintain stable economic performance, keep inflation generally stable, and ensure macroeconomic stability so as to be a bright spot still in the global economy.
(Source: PBC Monetary Policy Department)
