Central Bank Supervisory Media: From "Prudent" to "Moderately Loose," the Unchanging Factor is the Supportive Monetary Policy Stance

"To implement a moderately loose monetary policy. Utilize the dual functions of the total amount and structure of monetary policy tools, timely reduce the reserve requirement ratio and interest rates, maintain ample liquidity, and ensure that the growth of social financing scale and money supply aligns with economic growth and the expected target for overall price levels." The recent Central Economic Work Conference has set the tone for next year's monetary policy.

After more than 10 years, the tone of monetary policy has shifted from "prudent" to "moderately loose," sending a clear policy signal. At this critical juncture at the end of the year, how should we understand the monetary policy for 2024? What aspects does its support manifest in? What significant changes have occurred in the monetary policy regulation framework in the past year? How should we interpret the tone of "moderately loose"?

Supportive Monetary Policy Continues to Make an Impact

"Currently, insufficient effective demand, weak social expectations, and low price levels are prominent issues that macroeconomic regulation needs to address. This reflects both the short-term difficulties in economic operation and the deep-seated contradictions in medium- and long-term structural transformation. The recent regulatory approach has adapted accordingly," an industry expert told the Financial Times. "In this context, the central government decisively decided to launch a package of incremental policies, demonstrating a firm commitment to stabilizing the economy, stabilizing expectations, promoting consumption, and benefiting people's livelihoods."

Under the central government's deployment, the People's Bank of China has conducted in-depth research and prepared policy proposals. The Central Political Bureau meeting held on September 26 explicitly proposed lowering the reserve requirement ratio and implementing significant interest rate cuts. It aims to promote the stabilization of the real estate market. Subsequently, a series of policies from the central bank were quickly implemented and have been intensively rolled out recently. Significant reductions in the reserve requirement ratio, substantial interest rate cuts, optimization and adjustment of real estate financial policies, as well as the establishment of two tools for facilitating swaps between securities, funds, insurance companies, and special relending for stock repurchases... Since the release and implementation of the package of incremental financial policies, it has effectively boosted social confidence and played a good role in promoting the stable operation of the economy and finance.

Market data serves as clear evidence. Recently, the performance of financial markets such as stocks, bonds, and foreign exchange has shown a positive trend, and some macroeconomic indicators and high-frequency data have also improved marginally. In October, the manufacturing PMI was 50.1%, an increase of 0.3 percentage points month-on-month, returning to the expansion zone after five months, indicating a recovery in economic prosperity.

The Financial Times reporter has found that since the beginning of this year, the People's Bank of China has continuously increased its financial services to the real economy, implementing significant monetary policy adjustments four times, comprehensively utilizing various monetary policy tools, smoothing the transmission of monetary policy, promoting a stable decline in the comprehensive financing costs of society, aligning the scale of social financing and money supply with economic growth and price level expectations, and strengthening support for key areas and weak links, effectively addressing the five major financial issues.

"Unlike some countries internationally that maintain high interest rates and restrictive monetary policy stances, China insists on a supportive monetary policy," said Dong Ximiao, chief researcher at Zhongan. He told the Financial Times that the multiple measures of reducing the reserve requirement ratio and interest rates have been substantial and rapid, working in synergy with other macro policies to create a cumulative effect, effectively boosting market confidence and expectations, and creating a more favorable monetary and financial environment for economic recovery and growth

The Monetary Policy Regulation Framework Accelerates Its Evolution Towards Price-Based Control

One noteworthy change this year is that, in order to enhance the transmission efficiency of monetary policy, the People's Bank of China is focused on enriching its monetary policy toolbox and accelerating the evolution of its monetary policy regulation framework towards price-based control.

At the 15th Lujiazui Forum, Pan Gongsheng, Governor of the People's Bank of China, shared his thoughts on the future evolution of the monetary policy framework. He stated that to achieve ultimate goals, monetary policy needs to focus on and regulate certain intermediate variables. Most central banks in major developed economies primarily use price-based regulation, while China adopts a dual approach of both quantity-based and price-based regulation.

"The transition of the monetary policy framework from quantity-based to price-based is an important hallmark of modern monetary policy frameworks," an expert told the Financial Times. With the development of financial markets and the modernization of the economy, internationally, central banks in the U.S., Europe, and Japan experienced accelerated financial disintermediation from the 1980s to the 1990s, leading to a decline in the controllability, measurability, and relevance of quantity targets to the real economy, gradually downplaying quantity intermediary targets and shifting towards price-based regulation. Since the beginning of this year, financial aggregate data has been affected by multiple factors such as "squeezing out excess liquidity" and the diversion of wealth management products, which may indicate that China's monetary policy framework is entering a transformative moment, requiring greater emphasis on the role of interest rate regulation.

In recent months, the monetary policy regulation framework has been accelerating its evolution towards price-based control. Wen Bin, Chief Economist at China Minsheng Bank, told the Financial Times that a series of recent policies from the People's Bank of China have clearly reinforced the benchmark status of the 7-day reverse repurchase rate, downplaying the policy interest rate characteristics of the Medium-term Lending Facility (MLF), creating a buyout reverse repurchase to enhance the cross-period liquidity adjustment capability within one year, and narrowing the width of the interest rate corridor, further improving the precision of policy management. "After these measures were implemented, there have been positive results such as stronger linkage between the Loan Prime Rate (LPR) and the 7-day reverse repurchase rate, a more stable upward slope of the government bond yield curve, and stronger linkage between deposit and loan interest rates, gradually smoothing the interest rate transmission relationship from short to long," he added.

The "2024 Third Quarter Report on China's Monetary Policy Implementation" also stated that the transformation of the monetary policy regulation framework should continue to be promoted in the future. "As direct financing further develops, the participants in the financial market, product types, and transmission chains become more complex, making it increasingly difficult for monetary policy to directly regulate financial aggregates. The transformation of the monetary policy framework needs to be continuously advanced, with greater emphasis on the role of price-based regulation," industry experts indicated.

In addition to these intuitive changes, the Financial Times reporter also noted a clear signal—the policy communication mechanism of the People's Bank of China is becoming increasingly transparent and smooth. In fact, the ability of the People's Bank of China to communicate policy considerations and future outlooks in a timely, transparent, and clear manner with the market and the public is regarded as one of the important features of a modern monetary policy framework. "With increased transparency, the understandability and authority of policies will be enhanced, and the market will spontaneously form stable expectations regarding future monetary policy trends, reasonably optimizing its own decisions, making monetary policy regulation more effective," Pan Gongsheng stated "In recent years, the channels for expectation transmission have also undergone significant changes. Previously, relying on traditional channels such as press conferences, official press releases, and expert interviews had limited reach. Now, the influence of internet and self-media information dissemination channels like WeChat and Weibo is much broader. A self-media 'short article' can potentially cause significant disturbances to market expectations through the butterfly effect. These require the central bank to communicate timely and adequately with the market through new avenues, clearly articulating policy intentions and issues of market concern, thereby boosting market confidence while enhancing policy effectiveness," Dong Ximiao told reporters.

Monetary Policy Moves Towards Moderate Easing

Of course, many market participants are more concerned about how the monetary policy will exert its force in the new year.

The latest positioning from the Central Economic Work Conference has invigorated the market. Industry insiders believe that a moderately easing monetary policy means ample liquidity, low interest rates, and a relatively loose monetary credit environment, which is conducive to further increasing financial support for key areas and weak links, guiding more funds towards technological innovation, consumer spending, and green development, promoting consumption and expanding investment, and better stimulating the endogenous motivation and innovative vitality of the entire society.

"This positioning by the central government is closely linked to the economic development situation in our country," industry experts stated. Currently, the international environment is becoming more complex and severe, with increased instability in the world economy and uncertainty in international politics, insufficient domestic demand, and difficulties in production and operation for some enterprises, urgently requiring strong policy support.

In fact, from "prudent" to "moderately easing," the supportive stance of monetary policy remains unchanged. Observing the monetary policy over the past period reveals that supportive monetary policy itself possesses a certain degree of flexibility—against the backdrop of slowing domestic demand growth, increasing counter-cyclical adjustments in monetary policy can truly reflect supportive effectiveness and promote stable economic operation; if downward economic pressure eases, monetary policy will also return to normal, "easing when appropriate and tightening when necessary," which is a precise and effective manifestation of monetary policy.

Previously, the People's Bank of China has also repeatedly stated the need to vigorously boost consumption and comprehensively expand domestic demand. On October 18, at the opening ceremony of the 2024 Financial Street Forum Annual Conference, Pan Gongsheng proposed that "the direction of macroeconomic policy should shift from a greater focus on investment in the past to a balance between consumption and investment, with greater emphasis on consumption"; on December 2, he reiterated the need to "strengthen support for key areas such as technological innovation, green finance, and consumer finance."

Regarding how to better stimulate consumption, Wen Bin suggested more targeted measures to meet reasonable consumer financing needs, increasing financial support for the "two new" areas, and reducing residents' debt burdens to provide strong support for consumption recovery. Dong Ximiao stated that in terms of finance, efforts should be made to increase financial support for promoting consumption and expanding domestic demand, and to support and encourage financial institutions to innovate products and services, vigorously developing consumer finance business.

Author of this article: Ma Meiruo, Source: Financial Times, Original Title: "From 'Prudent' to 'Moderately Easing', Monetary Policy Adheres to Supportive Stance"

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