Box 1 Remarkable Progress in Improving the Modern Monetary Policy
Framework
Improving the modern monetary policy framework is an important part of building a
modern central banking system. It serves as an institutional base for implementing the
sound monetary policy well and for conducting an intertemporal policy design, and it
also satisfies the intrinsic need to promote high-quality development. In recent years,
improvements in the modern monetary policy framework have made remarkable
progress. According to the arrangements of the CPC Central Committee and the State
Council, the PBC has improved the mechanism for money supply management,
enhanced the market-oriented interest rate formation and transmission mechanism,
innovated and expanded the system of monetary policy instruments, and optimized the
RMB exchange rate formation mechanism.
First, the mechanism for money supply management has been improved.
According to the guidelines of the Central Economic Work Conference and the
requirements set forth in the Report on the Work of the Government, growth of broad
money (M2) and outstanding AFRE should match the nominal economic growth. The
PBC has precisely identified banks as the direct subject of money supply, and it has
improved the mechanism for money supply management by bringing into shape longterm mechanisms for liquidity, capital, and interest rate constraints.
It comprehensively
utilizes a wide array of monetary policy instruments to keep liquidity adequate at a
reasonable level and to alleviate liquidity constraints. From 2018 to 2021, the average
growth of M2 in China was 9 percent. The PBC has seen perpetual bonds as a
breakthrough in motivating banks to replenish capital via multiple channels so as to
ease capital constraints. In January 2019, the first perpetual bond of the banking sector
was issued. As of end-March 2022, banks have cumulatively issued RMB1.8915 trillion
worth of perpetual bonds, motivating banks to issue loans of approximately RMB10
trillion. Overall corporate financing costs have dropped steadily, which has eased
interest rate constraints. The weighted average interest rate on loans to enterprises
gradually declined to 4.36 percent in March 2022, a record low since statistics became
available. From 2018 to 2021, the average growth of M2 was virtually on par with the
nominal GDP growth of 8.3 percent over the same period. This has contributed to the
long-term optimized combination of economic growth, price stability, and full
employment.
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Second, the market-oriented interest rate formation and transmission mechanism
has been enhanced. In line with the arrangements of the CPC Central Committee and
the State Council, in August 2019 the PBC released a notice on the reform and
improvement of the loan prime rate (LPR) formation mechanism. The reformed LPR is
based on market-oriented quotes by panel banks that take into account the trend in
market rates with reference to the MLF rate. This has not only made loan rates more
market-based but it has also developed a transmission mechanism featuring “market
rates+central bank’s guidance→LPR→loan rates,” making monetary policy
transmission much more efficient. At present, the pricing of new loans basically uses
the LPR as the benchmark, and the shift to the LPR as the pricing benchmark was
completed in August 2020 for outstanding floating-rate loans. Meanwhile, the PBC
continues to optimize regulation of deposit rates. In June 2021, it guided the selfregulatory mechanism for interest rates to modify the self-regulated ceiling of deposit
rates by adding a margin to the benchmark interest rates. The PBC has strengthened
regulation of non-standard deposit innovation products and has maintained orderly
competition in the deposit market. In April 2022, it guided the self-regulatory
mechanism for interest rates to establish a market-oriented adjustment mechanism of
deposit rates, and it motivated banks to reasonably adjust deposit rates in accordance
with the changes in market rates, which made deposit rates more market-oriented. In
terms of effectiveness, since the LPR reform in August 2019, the weighted average rates
on enterprise loans has declined from 5.32 percent in July 2019 to 4.36 percent in March
2022, or a cumulative drop of 0.96 percentage points, higher than the 0.55 percentagepoint drop in the LPR over the same period. This has effectively promoted an ongoing
notable drop in the real loan rates and has largely eased the financing difficulties long
faced by the MSBs and has lowered their financing costs.
Third, the system of monetary policy instruments has been innovated and
improved. The PBC has accommodated the intrinsic need for high-quality
development, attached importance to introducing an incentive compatibility
mechanism, innovated and applied structural monetary policy instruments, and guided
financial institutions to step up support for relevant areas in line with the new
development concept.
Since 2018, it has cut the reserve requirement ratio (RRR) for 13
times, releasing long-term funding worth approximately RMB10.8 trillion. At endApril 2022, the average RRR for financial institutions stood at 8.1 percent, 6.8
percentage points lower than that at the beginning of 2018. Instruments such as central
bank lending and discounts have been adopted. At the beginning of 2021, an additional
RMB200 billion of central bank lending was made available to ten provinces (regions)
with slow credit growth. To promote coordinated regional development, the PBC
adopted a multi-pronged approach when guiding financial institutions to provide more
credit to regions with slow credit growth. In November 2021, the Carbon Emission
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Reduction Facility and the special central bank lending for the clean and efficient use
of coal were launched in parallel to precisely promote green and low-carbon
development. Since January 1, 2022, the two monetary policy instruments that directly
support the real economy have been converted into market-oriented policy instruments
in support of MSBs. In particular, the instrument supporting deferred repayments on
inclusive MSB loans was converted into an instrument supporting inclusive MSB loans.
For inclusive MSB loans issued by eligible locally incorporated banks,
the PBC offers
incentive funds, which are 1 percent of the increment in the MSB loan balance. The
support plan for inclusive unsecured MSB loans was incorporated into management of
central bank lending that supports rural development and MSBs. The RMB400 billion
central bank lending originally arranged to support inclusive unsecured MSB loans can
be rolled over. Recently, special central bank lending for sci-tech innovation and
inclusive elderly care has been launched to motivate financial institutions to step up
support for these two areas. At end-March 2022, outstanding inclusive loans to MSBs
was RMB20.8 trillion, 2.5 times that at the beginning of 2018. These loans supported
50.39 million MSBs, 2.2 times that at end-2018. The weighted average interest rate on
new inclusive loans to MSBs posted 4.93 percent in 2021, a drop of 0.22 percentage
points from 2020 and of 1.38 percentage points from 2018.
http://www.pbc.gov.cn/en/3688229/3688353/3688356/4583781/4584048/2022062209443031445.pdf
