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PBoC has plenty to say about 2020

(ATF) As widely announced on state media, such as CCTV, on August 6, the central bank released a report on the implementation of China’s monetary policy for the second quarter of 2020, covering hot topics such as the economic situation, monetary policy, Baoshang Bank, LPR reform, and real estate regulation.

One: Economic growth is expected to return to potentially close-to-normal levels.

The report said that China’s economy has shown strong resilience. As dealing with the coronavirus has become a state of “normal practice” economic and social operations have basically become normal, and the economy has accelerated to resume growth. 

At present, China’s epidemic prevention and control and economic recovery are at the forefront of the bank’s analysis. It claims world leading status – which is obviously debatable when compared to other Asian economies such a Korea, Taiwan and Japan, for instance – but as China was the first to get the coronavirus their developments in terms of managing the virus are ahead of countries such as the UK and the US.

The economy has evolved from the “supply and demand shock” brought about by the epidemic in the first quarter to a period of “rapid recovery of supply and gradual improvement in demand” in the second quarter. The market is expected to be generally stable. The half-year economic growth rate is expected to return to potentially normal growth levels. The report said China’s development was still strong and would enter a period of “important strategic opportunities for a long time”.

Talking about prices, the report said a preliminary estimate was that the average annual CPI increase would be within a reasonable range. The price of a variety of commodities had rebounded by varying degrees since the second quarter. The month-on-month increase in PPI had turned positive and the year-on-year decline had narrowed, which also reflected a recovery in demand.

But the recent flood conditions in some provinces had had an impact on the production and transportation of agricultural products. The rapid increase in money supply in developed economies may push up commodity prices in the future. And the epidemic’s global evolution and the impact of prevention and control measures on the supply chain and industrial chain were uncertain. The bank said it is still necessary to keep close attention to short-term price disturbances that various factors may cause. In the medium and long-term, there was no basis for long-term inflation or deflation in China.

Two: The bank says its prudent monetary policy is more flexible and moderately precise.

Specifically, the PBoC will guide market interest rates to operate smoothly around open market operating interest rates and medium-term lending interest rates; it will maintain a reasonable growth in money supply and the scale of social financing. The bank will promote loans to match the actual capital needs of market entities, so that funds can be invested in the real economy in a stable and orderly manner. The bank will strengthen organic coordination with financial departments to promote the smooth issuance of government bonds.

The report also emphasised that a sound and sustainable capital replenishment system and mechanism will improve the ability of banks to serve the real economy and prevent and resolve financial risks – through a series of policies such as reducing comprehensive financing costs, issuing loans with preferential interest rates, and implementing deferred principal and interest payments on loans for small, medium and micro enterprises.

Three: Baoshang Bank will file for bankruptcy

On May 24, 2019, Baoshang Bank was jointly taken over by the People’s Bank of China and the China Banking and Insurance Regulatory Commission due to serious credit risks. The takeover team fully exercised the operation and management power of Baoshang Bank and entrusted China Construction Bank to take care of Baoshang Bank’s business.

The PBoC said risk disposal work at Baoshang Bank is proceeding in an “orderly manner” and will soon be concluded. According to the investigation, Baoshang Bank was declared severely insolvent in debt liquidation and “capital verification”, so Baoshang will file for bankruptcy and the original shareholders’ equity and unprotected claims will be liquidated in accordance with the law. In addition, officials will hold relevant personnel accountable in accordance with laws and regulations.

Four: Interest rates that are too low will lead to negative impacts

The report noted that in line with lower real neutral interest rates and low inflation, some advanced economies have implemented zero or even negative interest rate policies. However, from the perspective of policy, the effect of low interest rate policies had not worked as well as expected. It remains to be seen what action the PBOC will take.

Excessively low interest rates would lead to many negative effects such as “resource misallocation”, “reduction of reality to virtuality”, the central bank said. Reducing the efficiency of financial resource allocation would aggravate structural distortions. Interest rates are the touchstone of market capital allocation. Excessively low interest rates may cause a large amount of capital to flow to “zombie companies” and exacerbate the problem of rising corporate debt and overcapacity, as well as hinder technological innovation and industrial upgrading and transformation. 

Secondly, negative or zero interest would encourages risk-taking behaviour in financial institutions and excessive leverage and would increase the vulnerability of the financial system. Thirdly, this would cause the economy to “fall out of reality”, which would lead to more funds being released by loose monetary policy to flow into the asset market.

The report emphasised that since 2020, the People’s Bank of China has adhered to the implementation of normal monetary policies, keeping interest rates dynamically adapted to China’s stage of development and economic situation. It said domestic and foreign currency interest rates were in an appropriate range, and the attractiveness of yuan assets had increased.

Five: The PBOC says Loan Prime Rate reform effectively unblocked monetary policy transmission channels.

Since recent reforms, LPR quotations have gradually declined, which better reflects the central bank’s monetary policy orientation and market capital supply and demand. It has become the main reference for bank loan interest rate pricing and has been internalised into the bank’s internal transfer pricing (FTP). The original implicit lower limit of loan interest rates has been completely broken, while monetary policy transmission channels have been effectively “dredged”.

At the same time, the LPR reform also effectively promoted the marketisation of deposit interest rates. From a practical point of view, with the benchmark deposit interest rate remaining unchanged, recent bank deposit interest rates of various maturities had declined. This fully reflected that the market mechanism that promotes a reduction of deposit interest rates through the LPR reform has played a role, while the transmission efficiency of monetary policy to deposit interest rates has also been improved, and important progress has been made in the market-oriented reform of deposit interest rates.

Point six: The bank says it firmly adheres to the belief that “housing is for living not speculation”.

In regard to real estate financial policy, the report emphasised that the central bank firmly adheres to the position that houses are used for living and not for speculation. It insists on not using real estate as a short-term economic stimulus, and wants stable land and house prices, and to maintain steady real estate financial policies. Continuity, consistency, and stability in the real estate industry are the new watchwords, and implementing a financial prudential management system in this sector is on its “to do” list.

Chris Gill

With over 30 years reporting on China, Gill offers a daily digest of what is happening in the PRC.


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