The State Council Information Office (SCIO) held a press briefing on 2021 financial statistics on January 18, 2022. The transcript is as follows.
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Xing Huina, Deputy Director-General of the SCIO Press Bureau and SCIO spokesperson: Good afternoon, friends from the press. Welcome to the press briefing held by the SCIO. Today we have Mr. Liu Guoqiang, Deputy Governor of the People’s Bank of China (PBC), to introduce China’s financial statistics in 2021 and take your questions. Also with us are Mr. Sun Guofeng, Director-General of the Monetary Policy Department, Mr. Zou Lan, Director-General of the Financial Market Department, and Ms. Ruan Jianhong, Director-General of the Statistics and Analysis Department.
First, let’s give the floor to Mr. Liu Guoqiang for a brief introduction.
Liu Guoqiang, Deputy Governor of the PBC: Good afternoon, friends from the press. It is a great pleasure to attend today’s press conference. I will start with China’s financial work in the past year and then our plans for the next stage.
Since the 18th National Congress of the Communist Party of China (CPC), the PBC, under the guidance of the Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era, has implemented the decisions and arrangements of the CPC Central Committee and the State Council, and acted upon the coordinated arrangements of the Financial Stability and Development Committee (FSDC) under the State Council. Adhering to the underlying principle of pursuing progress while ensuring stability, it has practiced a sound monetary policy, and thus contributed to China’s decisive victory in building a moderately prosperous society in all respects. Over the past few years, in particular, the monetary policy has constantly improved concerning its quality and efficiency in serving the real economy, and helped China to lead the world in economic development.
In 2021, under the guidance of the Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era, the PBC resolutely implemented the arrangements of the CPC Central Committee and the State Council, and strengthened inter-temporal adjustments based on China’s economic growth, which witnessed a slowdown in the year. The first half of the year saw many positive factors for the domestic economy. The PBC maintained liquidity adequate at a reasonable level, made good use of central bank lending and the two monetary policy tools which directly support the real economy, and improved regulation on deposit rates. It raised the foreign exchange reserve requirement ratio by 2 percentage points. While guiding money and credit growth back to normal, it strengthened efforts to optimize credit structure and lower financing costs. In the second half of the year, the domestic economy faced triple pressures of shrinking demand, supply shocks, and weakening expectations. The PBC coordinated policies for 2021 and 2022, and gave full play to the role of monetary policy tools in adjusting both the aggregate and structure. In July, the PBC cut the required reserve ratio (RRR) by 0.5 percentage points, releasing RMB1 trillion long-term liquidity, thereby better supporting the real economy and paving the way for a sustained and stable economic recovery in H2. In August, the PBC held a meeting to analyze monetary and credit development with financial institutions, aiming to guide them to enhance the stability of aggregate credit growth. In September, additional central bank lending in the amount of RMB300 billion for micro and small businesses (MSBs) was provided to encourage locally incorporated banks to issue more loans to MSBs and self-employed businesses. In November, the PBC launched the Carbon Emission Reduction Facility (CERF) and RMB200 billion of special central bank lending for clean and efficient use of coals, aiming to increase the overall energy supply capacity and promote clean and efficient use of coal. In December, the PBC cut the RRR by another 0.5 percentage points, which released around RMB1.2 trillion long-term funds. Therefore, the amount of long-term funds released from the two RRR cuts totaled RMB2.2 trillion. A meeting was held with financial institutions in December on money and credit development and financial institutions were guided to make proper inter-temporal credit arrangements for the turn of the year. The PBC lowered the interest rate on central bank lending in support of agriculture and MSBs by 0.25 percentage points, and the one-year loan prime rate (LPR) went down by 0.05 percentage points, thus ensuring that the overall financing costs for enterprises were stable with a slight decline. The two monetary policy tools which directly support the real economy were converted into market-based policy tools in support of MSBs, so as to bolster micro, small and medium-sized enterprise (MSME) financing. The PBC raised foreign exchange RRR for financial institutions by 2 percentage points to keep the RMB exchange rate basically stable at an adaptive and equilibrium level. So you can see measures were introduced one after another througout the year, almost in every month yet in an orderly way. All the measures have a clear target, especially in the second half of 2021, that is to ensure stable growth while optimizing structure.
Overall, the monetary policy in 2021 was flexible, targeted, reasonable and appropriate, and became more forward-looking, stable, precise, effective and independent. China’s major financial indicators maintained robust growth despite a high base in 2020. The financial sector remained stable and provided solid support for the real economy. In 2021, new RMB loans grew by RMB19.95 trillion, RMB315 billion more than the increase in the previous year. At end-2021, broad money supply (M2) and aggregate financing to the real economy (AFRE) grew by 9.0 percent and 10.3 percent year on year respectively, basically in line with nominal GDP growth. Averaged out over 2020 and 2021, M2 and AFRE increased by 9.5 percent and 11.8 percent respectively, basically in line with and even slightly higher than average nominal GDP growth in the two years. At end-2021, the macro leverage ratio stood at 272.5 percent, 7.7 percentage points lower than that at end-2020, remaining basically stable. The interest rates on loans to enterprises in 2021 stood at 4.61 percent, down 0.1 percentage points from 2020 and 0.69 percentage points from 2019, hitting a record low since the beginning of the reform and opening-up drive. At end-2021, outstanding medium and long-term (MLT) loans to the manufacturing sector increased by 31.8 percent year on year, 20.2 percentage points higher than the growth of all loans. At end-2021, inclusive MSB loans benefited over 44 million MSBs, with the balance registering an increase of 27.3 percent. The weighted average rate on newly-issued inclusive MSB loans in November recorded 4.98 percent, down 0.1 percentage points from December 2020.
In 2022, the PBC will implement the guidelines of the Central Economic Work Conference, prioritize stability and pursue progress while ensuring stability, pursue a sound monetary policy that is flexible and appropriate, and enhance inter-temporal adjustments. Giving full play to the role of monetary policy tools in adjusting both aggregate and structure, it will be more proactive, focus on providing policy support at an earlier stage, and guide financial institutions to extend stronger support for the real economy, especially for MSBs, sci-tech innovation and green development, so as to stabilize the macro economy and foster a favorable monetary and financial environment for high-quality economic development.
To be more specific, the PBC will focus on the following aspects.
First, we will maintain stable growth of the aggregate money and credit. The PBC will adopt a mix of monetary policy tools to keep liquidity adequate at a reasonable level, enhance the stability of aggregate credit growth, guide financial institutions to expand credit supply, and keep M2 and AFRE growth generally in line with nominal GDP growth.
Second, we will steadily optimize the credit structure. The PBC will give full play to structural monetary policy tools, effectively utilize market-based policy tools in support of MSBs, make good use of CERF and the special central bank lending in support of clean and efficient use of coals, while guiding financial institutions to increase credit supply to regions where credit grows slowly, so as to optimize the overall structure. Meanwhile, targeted measures will be rolled out to increase credit support for key areas and weak links.
Third, we will ensure that the overall financing costs for enterprises are stable with a slight decline. The PBC will improve the market-based interest rate formation and transmission mechanism, enhance the effectiveness of the LPR reform, and stabilize banks’ liability costs, so as to ensure that overall financing costs for enterprises remain stable with a slight decline. We will also encourage the financial system to cut profits in favor of the real economy.
Fourth, the RMB exchange rate will be kept basically stable at an adaptive and equilibrium level. The PBC will ensure that the market supply and demand play a decisive role in the formation of exchange rate, and the exchange rate serves as an automatic stabilizer for both macroeconomic development and the balance of payments. As a number of factors influence the exchange rate, inaccurate estimations are inevitable and two-way fluctuations are normal. Enterprises and financial institutions should remain “risk neutral”, and financial institutions are urged to provide services for MSMEs to help them hedge exchange rate risks and lower their costs in concern. Keeping RMB exchange rate basically stable at an adaptive and equilibrium level is one of our goals. Although the rate may deviate from the equilibrium level in a short term, in the mid and long run, market and policy factors will correct the deviation. Thank you.
Xing Huina: Thank you for your introduction, Deputy Governor Liu Guoqiang. Now it’s time for questions. Before bringing up your questions, please state your agency first.
CCTV, China Media Group: Considering that the top priority will be placed on stability this year, how will the PBC, while upholding the principle of ensuring stability, implement the requirement of “providing policy support at an earlier stage”, as proposed at the Central Economic Work Conference, so as to “pursue progress” in monetary policy? Thanks.
Liu Guoqiang: In 2021, the sound monetary policy was flexible, targeted, reasonable and appropriate, and we began implementing forward-looking measures in the second half of the year. Through a mix of measures, including a forward-looking RRR cut of 0.5 percentage points in July 2021, we prepared early to respond to downward pressure on economic growth, thus paving the way for the sustained and stable economic recovery in H2 2021 and Q1 2022. As required at the Central Economic Work Conference that policy support should be extended at an appropriately earlier stage, the PBC followed the arrangements of the CPC Central Committee and the State Council, and introduced a series of measures in December 2021, especially after the Conference. Specifically, we cut RRR by 0.5 percentage points, held a meeting on analysis of monetary and credit development with financial institutions, lowered the interest rates of central bank lending in support of the agriculture and MSBs by 0.25 percentage points, guided the one-year LPR to decline by 5 basis points, and converted the two monetary policy tools which directly support the real economy into market-based policy tools in support of MSBs. The first tool supports the deferral of loan repayments for enterprises. During the special period of pandemic containment, the PBC required that financial institutions should defer loan repayments for all eligible enterprises and provided certain policy incentives at the same time. The other tool is the support scheme for unsecured inclusive MSB loans. Now since China is making regular pandemic containment efforts amid the new normal in economic development, the two policies have been converted into market-based policy tools. The tools were once characterized by “requirements with policy incentives”, whereas now they are market-based, featuring “voluntary actions and incentives.” Under the new mode, financial institutions and enterprises can negotiate with each other on whether a deferment is applicable, and if so, we will also provide incentives. This is how the conversion works. We will step up inter-temporal adjustments to bolster economic growth in 2022.
As the economy faces triple pressures, “stability” itself is the greatest “progress” we seek to pursue. Before the downward pressure on economic growth is fundamentally relieved, the goal of “pursuing progress” should serve the undertaking of “ensuring stability.” We should refrain from introducing any policy that may undermine stability and roll out policies that are conducive to stability, so as to promote stability with progress. Simply speaking, the priority at present is to “ensure stability”, and policy support should be redoubled. How to redouble policy support? I think we can work on three aspects. First, we need to offer ample support by introducing more monetary policy tools, so as to keep the aggregates stable and avoid credit strains. Second, we need to offer targeted support by attaining to the broad and great while addressing the delicate and minute. The financial sector should not only welcome customers who walk in the door, but also, following the new development philosophy, take the initiative to seek good projects, make contributions effectively, and thus optimize the economic structure. Third, we need to provide support at an earlier stage. Though it is just the beginning of the year, we should waste no time and act proactively as a year is short. A year’s plan starts with spring. We need to be geared up and act proactively by staying ahead of market curve and responding to common concerns of the market in a timely manner. We must act without any delay; otherwise, market concerns will fall through and go away. A market with no concern has no “expectation”, which will make things even harder. So, we must not procrastinate, but get ahead and promptly respond to common concerns of the market.
Under the strong leadership of the CPC Central Committee and the State Council, all parties concerned are pooling efforts. I believe we might also find a year quite long, and the “mounting downward economic pressure” would be a story of the past in a few months. Then, what efforts will we make?
First, we will maintain a stable growth of aggregates. We will employ a mix of monetary policy tools to keep liquidity adequate at a reasonable level, enhance the stability of aggregate credit growth, and keep the growth of money supply and AFRE generally in line with nominal GDP growth.
Second, we will steadily optimize structure. We will innovate and effectively utilize structural monetary policy tools to continue increasing credit support for MSBs, sci-tech innovation and green development.
Third, we will ensure that the financing costs for enterprises are stable with a slight decline, continue to leverage the efficacy of LPR reform, earnestly safeguard orderly competition in the deposit market, and stabilize banks’ liability costs. It is very important to ensure orderly competition in the deposit market, because the deposit rates will soar up once competition goes disorderly. Inferior banks with poor performance and insufficient deposit would tempt people to make deposits with higher interest rates, which will drive up deposit rates in the market and other banks will have no other choice but to follow their suit. In this way, the market order and interest rates of bank deposits will be misguided by such poor-performing banks. In addition, excessively high deposit rates will make it difficult for lending rates, as well as enterprises’ financing costs, to drop. Therefore, we are now working hard to safeguard the order of the deposit market, stabilize banks’ liability costs, and keep overall financing costs for enterprises, especially for MSBs, stable with a slight decline. Thank you.
The Paper: The PBC and other financial regulators have taken some measures to respond to the new changes in the real estate market. How are things going right now? Thank you.
Zou Lan, Director-General of the Financial Market Department of the PBC: In the second half of last year, the risks of some real estate enterprises such as Evergrande were exposed. As a result, a spike in risk aversion was sparked off for all types of real estate market entities, and financial institutions made short-term stress responses. To cope with the issue, in line with the arrangements of the CPC Central Committee and the State Council, financial regulators promptly took countermeasures focusing on the following aspects. First, following the law-based and market-based principles, we collaborated with the People’s Government of Guangdong Province, relevant authorities and local governments to defuse risks of the enterprise. Second, we guided banking institutions to accurately understand and implement the prudential management practices of real estate finance, keep stable and orderly credit supply for the real estate sector, and thus satisfy reasonable financing needs of the real estate market. Third, we issued the Notice on Effectively Offering Financial Services for Mergers and Acquisitions of Risk Resolution Projects of Key Real Estate Enterprises, to guide financial institutions to support risk resolution and industry clearing with market-based approaches.
With the joint efforts of all parties concerned, real estate sales, land purchases and financing have gradually returned to normal recently, and market expectations have steadily improved. The statistics show that at end-2021, the outstanding real estate loans nationwide amounted to RMB52.2 trillion, up by 7.9 percent year on year, an acceleration of 0.3 percentage points from the end of September 2021. In particular, newly issued real estate loans reached RMB773.4 billion in Q4 2021, up RMB202 billion year on year and RMB157.8 billion more than the increase in Q3 2021.
In the next stage, the PBC will resolutely implement the decisions and arrangements of the CPC Central Committee and the State Council, earnestly act upon the guidelines of the Central Economic Work Conference, and stay committed to the principle that “housing is for living in, not for speculation.” We will follow the requirements of exploring new development models, fully implement the long-lasting mechanism of real estate, and maintain the continuity, consistency and stability of real estate finance policies. We will prudently implement the prudential management practices of real estate finance, boost support for rental housing finance, and practice city-specific policies to promote the virtuous cycle and sound development of the real estate sector. Thank you.
South China Morning Post: The PBC lowered the interest rates of both the medium-term lending facility (MLF) and reverse repos on Monday, which was more than expected. Does this indicate the unfolding of another easing cycle, and will the LPR be lowered accordingly this week as well? Meanwhile, as the US Federal Reserve (Fed) signaled accelerated tapering and an interest rate hike, is the PBC concerned about capital outflows or RMB depreciation caused by the divergence between Chinese and US monetary policy? What are the specific arrangements concerning macro policy coordination between China and the US? Thank you.
Sun Guofeng, Director-General of the Monetary Policy Department of the PBC: Since the beginning of this year, the PBC has enhanced inter-temporal adjustments and the supply of liquidity. On January 17, we facilitated the reduction of interest rates on 1-year MLF and 7-day open market operations (OMO) by 10 basis points, and the money market and bond market interest rates dropped accordingly. As the quoting banks of LPRs take factors including their capital costs, risk premium and market supply and demand into consideration when making quotations, LPRs will fully and timely reflect the change in market interest rates, guiding financial institutions to lower lending rates for enterprises and thereby effectively promoting the reduction of their overall financial costs. We’ve noticed that major developed economies have begun to adjust their monetary policy lately, and the market has relatively strong expectations for the Fed’s interest hike and balance sheet contraction. Meanwhile, China has a large and resilient economy, and we have maintained a normal monetary policy since the outbreak of the pandemic. Instead of indiscriminate stimulus, with a focus on inter-temporal policies, we kept liquidity adequate at a reasonable level, and rendered solid financial support for the real economy. China’s financial system has become more stable and independent and RMB exchange rate expectations remain stable. All these factors can help mitigate and respond to external risks. So overall, how the developed economies adjust their policies will have a limited impact on China.
Going forward, the PBC will prioritize stability, focus on domestic conditions and, on this basis, properly handle the intensity and pace of the sound monetary policy. Meanwhile, we will make the RMB exchange rate more resilient, and leverage its role in macroeconomic adjustment and as an automatic stabilizer for balance of payments. We will guide market entities to establish a risk-neutral concept, strengthen macroprudential management of cross-border capital flows, better manage expectations, and keep the RMB exchange rate basically stable on an adaptive and equilibrium level. We will proactively and prudently respond to the monetary policy changes of developed economies. Thank you.
21st Century Business Herald: What were the structural characteristics of the AFRE growth in 2021? What is your forecast for AFRE and credit growths in 2022? Thank you.
Ruan Jianhong, Director-General of the Statistics and Analysis Department of the PBC: I will take this question. In 2021, the AFRE (flow) was RMB31.35 trillion, down RMB3.44 trillion year on year but up RMB5.68 trillion from 2019. This indicates strong financial support for the real economy. At end-2021, the growth of AFRE registered 10.3 percent, which was generally in line with nominal GDP growth.
Let me explain by structure. First, the loans from financial institutions to the real economy remained stable. In 2021, the RMB and foreign currency-denominated loans issued to the real economy grew by RMB20.11 trillion, basically on par with that in 2020 and up RMB3.36 trillion from 2019.
Second, bond financing returned to normal and equity financing saw prominent accelerated growth. In 2021, government bond financing totaled RMB7.02 trillion, down RMB1.31 trillion from 2020. This was mainly due to the issuance of RMB1 trillion of special treasury bonds in 2020 in support of pandemic containment, and the issuance returned to normal in 2021. Bond financing by non-financial enterprises amounted to RMB3.29 trillion, down RMB1.09 trillion from the previous year. Domestic equity financing by non-financial enterprises amounted to RMB1.24 trillion, up RMB343.4 billion year on year.
Third, off-balance-sheet financing dropped significantly. In 2021, entrusted loans, trust loans and undiscounted bankers’ acceptances recorded a net decrease of RMB2.67 trillion, which was RMB1.35 trillion more than the decrease in 2020.
In 2022, the PBC will earnestly implement the guidelines of the Central Economic Work Conference, practice a sound monetary policy that is flexible and appropriate, keep liquidity adequate at a reasonable level, and keep the AFRE growth basically in line with nominal GDP growth. Thank you.
Economic Daily: Here is my question. Just yesterday, the PBC cut the interest rates of reverse repos and the MLF both by 10 basis points. What are the main considerations for and effects of such a move? Thank you.
Sun Guofeng: The MLF and open market reverse repos are operated through market-based bidding. The interest rate comes from the bids of participating institutions, and is determined by multiple factors including liquidity of the banking system, demand for central bank funds from financial institutions, as well as market expectations. Since the beginning of 2022, the PBC implemented the guidelines of the Central Economic Work Conference by enhancing inter-temporal adjustments and liquidity injection. On January 17, we conducted one-year MLF operations in the amount of RMB700 billion and 7-day open market reverse repos in the amount of RMB100 billion, with an aim to increase liquidity supply, offset the impact of short-term factors in advance such as peak tax periods in January, the accelerated issuance of government bonds, and the increase of public cash before the Spring Festival, and to keep liquidity adequate at a reasonable level. Therefore, the MLF and the open market reverse repo rates both fell by 10 basis points. In particular, the one-year MLF rate dropped from 2.95 percent to 2.85 percent, and the 7-day reverse repo rate dropped from 2.20 percent to 2.10 percent.
This decrease in MLF and OMO rates reflects proactive and forward-looking support of monetary policy, which helps boost market confidence, lower interest rates on corporate loans via LPR transmission, drive bond rates downward, and keep the overall financing costs for enterprises stable with a slight decline. These operations also contribute to stimulating the financing needs of market entities, enhancing the stability of aggregate credit growth, encouraging the issuance of central and local government bonds, stabilizing the broader economy, and maintaining a balance between internal and external equilibriums. Thank you.
China Business News (CBN): According to the recent financial data released by the PBC, the growth of AFRE has slowed down rapidly. And some securities firms raise the opinion in their research that appropriate stimulus is needed to restore the growth of financing in 2022. Do you think the leverage ratio will likely rebound in 2022? Thank you.
Liu Guoqiang: In 2021, thanks to the scientific and effective measures taken to contain the pandemic, we made significant progress in stabilizing the leverage ratio and promoting growth. In 2021, China’s macro leverage ratio fell by 7.7 percentage points from end-2020 to 272.5 percent, representing a decline for the fifth consecutive quarter. Both the numerator and the denominator matter to the macro leverage ratio, which is the result of total debt divided by GDP. While total debt, as the numerator, was generally stable last year, GDP, as the denominator, expanded considerably, recording a growth rate much higher than 2020, and contributed greatly to lowering the leverage ratio. The rapid GDP growth was attributable to a number of factors, such as China’s effective control of the pandemic, continued recovery of the national economy, and greater resilience in China’s development.
The macro leverage ratio is expected to remain basically stable in 2022. As stressed at the Central Economic Work Conference, in economic work in 2022, we should give top priority to stability while pursuing progress, adopting macro policies that are sound and effective, and taking steps to boost the internal drive for development. The continuous decline in the macro leverage ratio has made room for the financial system to ramp up future support for MSBs, sci-tech innovation, and green development. It has also given space to future monetary policy. The lower the leverage ratio, the larger the space. As China has had better control of the pandemic than many other countries and features strong resilience in economic growth, the Chinese economy is expected to grow at a faster pace still this year than major developed economies. Therefore, the large denominator will create conditions for better maintaining the macro leverage ratio in the future. By upholding systemic thinking and making coordinated efforts, we will effectively implement cross-cycle monetary policy to serve high-quality economic development. Thank you.
CNBC: I have two questions. First, would you talk about the policy support for home purchase and for property loans? Second, regarding e-CNY, how are the pilot programs and the R&D project getting on? For example, is there any information about its daily trading? Will it be applied in new scenarios? Any new tries during the Beijing Winter Olympics when more people are coming from abroad? Thank you.
Zou Lan: Let me start with your second question. The PBC has launched e-CNY pilot programs in Shenzhen, Suzhou, Xiong’an, Chengdu, Shanghai, Hainan, Changsha, Xi’an, Qingdao, Dalian and the scenarios of the Beijing Winter Olympics. They span the Yangtze River Delta, the Pearl River Delta, the Beijing-Tianjin-Hebei region, and China’s central, western, northeastern and northwestern regions. As of December 31, 2021, e-CNY had been applied in over 8.0851 million scenarios, with a total of 261 million personal wallets opened and the transactions amounting to RMB87.565 billion. The pilot programs have effectively tested the business and technological designs as well as robustness of the e-CNY system, user-friendliness of the products, and the applicability of the use cases. They have also enhanced public understanding of the e-CNY design concept.
Going forward, the PBC will continue to prudently advance the pilot e-CNY R&D project in line with China’s 14th Five-Year Plan, and push forward with pilot e-CNY use in scenarios such as retail trade, utility payment, and government services. We will work towards the aim of serving the real economy and people’s lives so that more businesses and individuals will know the value of e-CNY and be fully motivated to participate in the project.
As for policies on home purchase, which you asked about in your first question, the real estate market has its prominent regional features. The long-term mechanism for the management of the real estate sector is more about the responsibilities of local governments, who should adopt city-specific policies based on local market conditions to regulate the real estate market. So they are in a position to answer questions on home purchase policies. Regarding policies on property loans, as I said just now, we will adhere to the principle that housing is for living in, not for speculation, and will follow the arrangements under the long-term mechanism to keep the market basically stable. In line with the general requirements of stabilizing land prices, housing prices and expectations, what’s most important is to keep policy expectations stable. Admittedly, as I mentioned, some financial institutions overreacted to market changes in the second half of 2021 amid concerns over market situation and emerging risks. So the PBC and other financial regulators have enhanced communication with relevant financial institutions since late September 2021 in order that they can rightly judge market situation, better implement the regulations on prudential management of real estate finance, and meet reasonable financing needs of the real estate market. Thank you.
Phoenix TV: Again, I would like to ask questions about monetary policy. How does the PBC view the scope and possibility of any further RRR cuts on the basis of yesterday’s interest rate cut? In particular, is there any possibility of further RRR cuts in January, and is there still room for interest rate cuts in Q1? Thank you.
Liu Guoqiang: Thank you. I will take this question. As for interest rates, with the steady progress of market-oriented reform, especially since the LPR reform in 2019, China has gradually improved the market-oriented mechanism of interest rate formation, regulation and transmission. I suggest viewing interest rates from two perspectives. One is to look at the actual changes in lending rates, which means directly focusing on results. Since 2021, by continuously optimizing the LPR reform, the PBC smoothed the transmission of monetary policy, enhanced competition in the credit market, and effectively drove real lending rates down steadily on the back of a significant decline in the previous year. In 2021, the corporate lending rates hit 4.61 percent, the lowest in more than four decades since the launch of reform and opening up.
Another perspective is to analyse the factors that affect interest rates, or the rationale behind them. LPR is formed according to the market-oriented quotation by panel banks based on actual lending rates for the most favorable customers. Capital costs, market supply and demand, risk premium and other factors have all affected LPR quotation. In addition, funding costs are also impacted by OMO rates, MLF rates, and the regulation on deposit rates. Since 2021, the PBC stepped up cross-cycle policy adjustments, cutting RRR in July and December respectively to keep liquidity adequate at a reasonable level. It improved the self-regulatory management of deposit rates in June, and cut the interest rates of central bank lending in support of agriculture and MSBs by 0.25 percentage points in December. Such policies effectively reduced banks’ funding costs, driving the 1-year LPR down by 5 basis points in last December, where the reduction of banks’ funding costs led to the corresponding reduction of lending rates. On January 17, 2022, the PBC stepped up liquidity provision, driving down both the 7-day OMO and one-year MLF rates by 10 basis points. The money market and bond market also saw corresponding reduction in interest rates. In two days, on January 20, commercial banks will offer the most favorable lending rates. Commercial banks are sensitive to the funding costs and other factors, and will offer quotations considering the latest changes of various factors.
I’d like to take this opportunity to introduce some technical aspects of LPR, or the loan prime rate. LPR is only general and not industry specific. It comes in two maturities, i.e., 1-year LPR and 5-year LPR. When issuing working capital loans, or short-term loans to enterprises, financial institutions generally refer to 1-year LPR for pricing. When issuing MLT loans, such as loans to manufacturers, fixed asset investment loans and personal housing loans, they refer to 5-year LPR. LPR is a macro variable that does not change in an industry-specific manner. That is to say, it impacts all industries. Rather than being tailor-made for any sector or any person, it is aggregate and inclusive. When the rate changes, it will have an impact on Tom, Dick or Harry and even beyond.
With regard to RRR, in 2021, the PBC lowered the RRR by 0.5 percentage points across the board in July and December respectively, releasing RMB2.2 trillion of long-term funds, which improved the funding structure of financial institutions and demonstrated the capacity of the financial sector to serve the real economy. Following the RRR cuts, the current average RRR for financial institutions is 8.4 percent, which is not high anymore compared with that of other developing economies or of our own records, leaving less room for further adjustments. But to put it another way, there is still room for manoeuvre, despite being smaller, in light of the economic and financial developments as well as needs of macro regulation. Thank you.
Bloomberg: I have two questions. First, considering the relatively large interest rate gap between the US and China, would it have an impact on the exchange rate? What’s China’s response? Second, do you think corporate borrowing demand is weak now? Based on December statistics, we noticed there were marked short-term interbank lending and corporate loans. Does it reflect a weak corporate lending demand? Thank you.
Sun Guofeng: I will take your questions. For the first one, China has been adopting a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies. The movement of RMB exchange rate will be affected by market supply and demand, as well as international market development among other factors, and the market forces will play a decisive role in the rises and falls of RMB exchange rate. With increased elasticity, the RMB exchange rate will fluctuate in both directions, playing its role as an automatic stabilizer for both macroeconomy and the balance of payments, and promoting the balance between internal and external equilibrium. With the development of the international financial markets, cross-border capital flows might fluctuate. Given China as a super large economy, its sound domestic economic development has laid a good foundation for maintaining internal and external equilibrium.
In general, cross-border capital flows will realize dynamic equilibrium. Going forward, the PBC will continue to pursue stability as its top priority, and practice a sound monetary policy that is flexible and appropriate with a focus on domestic situation. The RMB exchange rate will carry on with its role as an automatic stabilizer for macroeconomy and the balance of payments. The PBC will enhance macroprudential management of cross-border capital flows and strengthen management of expectations. Moreover, it will guide enterprises and financial institutions to remain risk neutral, and strike a balance between internal and external equilibrium. All these measures will help keep RMB exchange rate basically stable at an adaptive and equilibrium level.
Let’s move on to your second question. Since 2021, we have implemented a sound monetary policy that is flexible, targeted, reasonable and appropriate. To tackle with the downward pressure brought by shrinking demand, supply shocks, and weakening expectations, the PBC started to boost financial support to the real economy from the second half of 2021 in a forward-looking manner through measures like RRR reduction, additional central bank lending for MSBs, and the launch of the CERF and special central bank lending for the clean and efficient use of coal. Starting from December 2021, the PBC further intensified inter-temporal adjustment, made policy transition for the next year, reduced RRR by 0.5 percentage points and guided financial institutions to underpin the stable growth of aggregate credit. The 1-year LPR was lowered by 5 basis points, and structural monetary policy tools were actively leveraged for complementary effects. The two monetary policy tools directly supporting the real economy were continued with modified arrangements. Such measures helped stabilize the aggregate credit and improve the credit structure in 2021. This would also contribute to a stable start in 2022 from an inter-temporal perspective. In 2021, loans registered an increase of RMB19.95 trillion y-o-y, RMB315 billion more than the increase in 2020, which accelerated by RMB2.8 trillion from 2019. The expedited growth indicated enhanced financial support for the real economy. The growth of loans remarkably sped up in 2020 from 2019, based on which a further rise was witnessed in 2021. In December, loans went up by RMB1.13 trillion, slightly less than the increase in December 2020 which formed a high base number of loans due to the relatively strong credit supply by financial institutions in response to the pandemic in 2020. According to historical statistics, in China, December is usually a month with low increase in loans, with the loan growth averaging less than RMB1 trillion in December from 2016 to 2019. In this sense, compared to the pre-pandemic statistics, loans were issued to the real economy in an intensified manner in December 2021, which demonstrates a fast-acting effect of policies. Since the beginning of this year, the PBC has enhanced inter-temporal adjustments, increased liquidity supply and drove MLF and OMO rates down by 10 basis points respectively, which helped motivate the financing needs of market entities and further stabilize the aggregate credit growth.
Going forward, the PBC will continue to prioritize stability, practice a sound monetary policy that is flexible and appropriate, and intensify inter-temporal adjustments. With monetary policy tools playing their roles in adjusting both the aggregate and the structure, the PBC will keep liquidity adequate at a reasonable level, and guide financial institutions to vigorously expand credit supply. As the effects of PBC policies start to surface and accumulate, financial institutions will provide more loans to the real economy, further stabilize the growth of aggregate credit, and allocate more credit resources into key areas and weak links such as MSBs, sci-tech innovation and green development. Money supply and AFRE growth will be kept generally in line with nominal GDP growth. Thank you.
Ruan Jianhong: I would like to share more data for the second question.
At end-2021, outstanding RMB and foreign currency denominated loans to enterprises and public institutions grew by 11 percent, 1.4 percentage points lower y-o-y, while 0.5 percentage points higher than that at end-2019. In 2021, loans to enterprises and public institutions posted an increase of RMB12.14 trillion, almost on par with that in 2020. In particular, MLT loans grew by RMB9.24 trillion, up RMB464.2 billion y-o-y.
As for the sectors where the MLT loans were actually extended, the MLT funding support by financial institutions to key areas remained solid.
First, MLT loans to the manufacturing sector kept expanding fast. The loans registered a growth of 31.8 percent at end-2021, 18.1 percentage points higher than the growth rate of MLT loans to all sectors. In 2021, loans to the manufacturing sector increased by RMB1.67 trillion, up RMB300.5 billion y-o-y. Specifically, MLT loans to high-tech manufacturing sector grew by 32.8 percent or RMB364.3 billion.
Second, MLT industrial loans witnessed remarkable growth. At end-2021, MLT industrial loans grew by 22.6 percent, up 2.6 percentage points y-o-y. MLT industrial loans registered an increase of RMB2.49 trillion, RMB650.3 billion more than the increase at end-2020.
Third, MLT loans to the infrastructure sector grew fast in a steady manner. At end-2021, MLT loans to the infrastructure sector reported a growth of 15.3 percent, 1.1 percentage points higher than that at end-2020. MLT loans to the infrastructure sector increased by RMB3.82 trillion in 2021, up RMB734.6 billion compared to the rise in 2020.
Fourth, MLT loans to the service sector (excluding the real estate sector) kept rapid growth. The loans went up 15.4 percent at end-2021, 1.7 percentage points higher than the growth of MLT loans to all sectors. We saw an increase of RMB5 trillion of such loans, RMB261.8 billion more than the increase in 2020. Thanks.
Liu Guoqiang: I would add a few points for the first question concerning exchange rate for your reference. It has been increasingly difficult to observe exchange rates. For instance, the interaction between RMB and USD exchange rates often follow certain patterns, usually displaying a seesaw effect where RMB depreciates as USD appreciates. In 2021, there occurred several times when USD strengthened, RMB appreciated even further , which seems hard to understand, adding to the complexity of short-term observation. It is reasonable, however, if we consider the supporting factors for RMB appreciation such as relatively rapid economic growth, large trade surplus and, in particular, previously optimistic market expectations. These factors combined led to the short-term phenomena where USD appreciated and RMB strengthened further. However, over a longer period, the situation would make sense, where RMB exchange rate has generally remained stable at an adaptive and equilibrium level and fluctuated in both directions. Therefore, from a perspective of a longer term, the patterns remain unchanged, but it seems harder to make short-term estimates or predictions. The RMB exchange rate has remained stable from a long-term perspective.
In addition, China is a large economy. Constant unilateral appreciation or depreciation of the exchange rate is rarely seen in large economies, and it is even more unlikely in China. That is because our macro management and regulation is appropriate and adaptive without excessive liquidity stimulus, and we follow the law of economy with effective micro market mechanisms. Despite certain disturbing factors, RMB exchange rate has been basically stable at an adaptive and equilibrium level. Thank you.
Xing Huina: We appreciate all the speakers for their professional and detailed responses and introduction. This is the end of today’s press briefing and thank you all.
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