Pan Gongsheng: China's current monetary policy stance and
evolution of monetary policy framework in the future
Keynote speech by Mr Pan Gongsheng, Governor of the People's Bank of China, at the
15th Lujiazui Forum, Shanghai, 19 June 2024.
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Distinguished Party Secretary Chen Jining, Mayor Gong Zheng, Deputy Director Wang
Jiang, Minister Li Yunze, Chairman Wu Qing, Administrator Zhu Hexin, and dear
guests,
Good morning!
It's a great pleasure to join you at the Lujiazui Forum. Supporting the development of
Shanghai as an international financial center, and encouraging foreign financial
institutions and international financial organizations to settle in Shanghai is a major task
for the PBOC to implement important instructions of General Secretary Xi Jinping as
well as the decisions and arrangements of the CPC Central Committee.
We witnessed the ceremony to launch the IMF Shanghai Regional Center just now. The
IMF is an international financial organization of global significance. We are confident
that Shanghai Regional Center will deepen the cooperation between the IMF and
China, enhance macroeconomic policy exchanges and coordination among countries in
the Asia Pacific region, and safeguard global and regional financial stability.
The PBOC will work together with Shanghai Municipal Government, relevant
departments, and market institutions to support, as always, the development of
Shanghai as an international financial center and expand the high-level opening-up of
the financial sector.
Today, I would like to take this opportunity to have exchanges with you on issues
related to China's current monetary policy stance and the evolution of monetary policy
framework in the future.
I. Current monetary policy stance
Since the beginning of this year, the global inflation has started to cool down, but it is
still strongly sticky. Some central banks such as the ECB have begun their rate cuts
while some others are still observing the developments and may cut rates later this
year. On the whole, central banks remain unchanged with their high interest rates and
restrictive monetary policy stance. China differs somewhat from them. Our monetary
policy stance is accommodative, providing financial support for the continuous
economic recovery.
In terms of the aggregates of monetary policy, the PBOC has adopted a variety of
monetary policy instruments, such as cutting the required reserve ratio and policy rates,
and bringing down market rates such as the loan prime rates (LPR), which created a
favourable monetary and financial environment for the high-quality development of the
economy.
At May-end, the year-on-year growth rate of the aggregate financing to the real
economy (AFRE) and M2 registered 8.4 percent and 7 percent, respectively, both
higher than the nominal GDP growth rate of 4.2 percent in the first quarter of this year.
The interest rate on new loans issued in May stood at a relatively low level of 3.67
percent.
Concerning the structure of money and credit, the PBOC gave full play to the role of
macro-prudential policies and structural monetary policy instruments. We have initiated
the central bank lending for sci-tech innovation and technological transformation, which
aims to enhance financial support for sci-tech innovation and equipment upgrading and
renovation. We have launched a package of policies to support the real estate sector,
including lowering the minimum down payment ratios for individual's commercial
housing mortgages, abolishing the mortgage floor rates, and cutting the interest rate on
personal housing provident fund loans. We have also set up the central bank lending for
affordable housing, to accelerate destocking commercial properties in a market-based
manner.
Currently, outstanding structural monetary policy instruments register around RMB7
trillion, accounting for about 15 percent of the balance sheet of the PBOC. The
instruments were set to support key areas and week links of the national economy,
such as the development of micro and small businesses and green transformation.
Regarding the transmission of monetary policy, we have made efforts in regulating
market behaviors, making better use of existing low-efficient financial resources,
enhancing the efficiency of fund use, thus smoothing the transmission of monetary
policy.
Since the beginning of this year, we worked together with the National Bureau of
Statistics to improve the accounting method of the quarterly value-added of the financial
sector. The accounting method has been adjusted from reckoning based on the growth
of deposits and loans to income-based, which more truthfully reflects the value-added
of the financial sector, and weakens the impulses of some local governments and
financial institutions to shoot up deposits and loans at crucial time points. Meanwhile,
After decades of operation as commercial and market-based entities, some financial
institutions are still obsessive about scale expansion. They expanded their scale
through undue and irrational competition, which was not supposed to happen. We
regulated some market behaviors that are irrational or may undermine the transmission
mechanism of monetary policy. For example, we promoted a balanced supply of credit,
reduced and prevented the circulation of funds within the financial system, and rectified
the behavior of luring depositors with manual interest subsidy.
In the short term, these regulatory measures will have the effect of "squeezing water"
out of the financial aggregate data, but that does not stand for a shift in the monetary
policy stance. Instead, it will help us more in improving the efficiency of monetary policy
transmission, achieving a balanced pace of credit growth, alleviating the distortions in
resource allocation, easing the problem of circulating funds for the sake of arbitrage,
and forestalling and defusing financial risks. It will also be conducive to providing
highquality financial services for economic and social development as well as the healthy
development of financial institutions and financial markets.
As for exchange rates, the RMB exchange rate has remained basically stable in
complicated circumstances. Entering this year, we have seen the major advanced
economies postponing once and again their timing of monetary policy reversal.
Meanwhile, the China-U.S. interest rate spread has continued to be relatively high.
Letting the market play a decisive role in the formation of exchange rates, we have
maintained the flexibility of the exchange rate while strengthening guidance of
expectations and taking firm steps to prevent the risks of exchange rate overshooting.
Through sustained effort over the years, China's foreign exchange market has achieved
substantial progress and development, with market participants becoming more mature
and transacting in a more rational manner. An increasing number of business entities
are using the tools for exchange rate risk hedging. Moreover, as the RMB cross-border
receipts and payments now account for 30 percent of trade in goods, the exposure of
enterprises to currency exchange risks has been reduced. We are also more
experienced in coping with foreign exchange market fluctuations. As major economies
are gradually reversing their monetary policies this year and the dollar appreciation is
weakening, the difference between the monetary policy cycles at home and abroad is
narrowing. These factors combined will help keep the RMB exchange rate basically
stable and balance cross-border capital flows, thereby gaining more space for China's
monetary policy maneuvers.
Looking ahead, while undergoing continued recovery, the Chinese economy is still
confronted with some challenges, mainly in that the effective demand is still insufficient;
there are blockages to domestic economic circulation, and the complexity, severity, and
uncertainty of the external environment have risen significantly. Adhering to an
accommodative monetary policy stance, we will strengthen counter-cyclical and
intertemporal adjustments, help consolidate and add momentum to the economic recovery,
and create a favorable monetary and financial environment for economic and social
development.
In the process, we will pay special attention to the handling of three sets of
relationships. First, the relationship between short-term and long-term
concerns. Maintaining price stability and pushing for a mild rebound in prices will be an
important consideration. We will use interest rates, reserve requirements, and other
policy instruments in a flexible manner while maintaining policy resolve and avoiding
drastic policy swings. Second, the relationship between stabilizing growth and
preventing risks. We will take a coordinated approach in balancing the provision of
support for the real economy and the need to maintain the soundness of financial
institutions. We will be committed to forestalling and defusing financial risks while
promoting high-quality economic development. Third, the relationship between internal
and external concerns. In conducting the regulations, we will focus primarily on
domestic economic and financial conditions while taking into account the spillover
effects from the economic and monetary policy cycles of other economies.
II. Some thoughts on the evolution of future monetary policy framework
Based on years of practice and exploration, the monetary policy framework with
Chinese characteristics has preliminarily taken shape and witnessed continuous
improvement. Globally, explorations into the theory and practice of monetary policy
have also been evolving. Since the beginning of this year, in light of the changing
situation, the European Central Bank and the Bank of Japan have adjusted
successively their monetary policy frameworks. Meanwhile, the Bank of England has
conducted a review of its policy making, forecasting, and communication. To better
serve the needs of high-quality development, we are also conducting research on
China's future monetary policy framework.
First, we will optimize the intermediate target variables for monetary policy. As
prescribed by law, the ultimate objective of China's monetary policy is to maintain the
stability of the currency value and thereby promote economic growth. To achieve the
ultimate objective, we need to keep an eye on and target some intermediate variables
in the execution of monetary policy. While price-based regulation is prevalent in most of
the major advanced economies, China adopts a combination of quantity- and
pricebased regulatory measures.
Traditionally being quite attentive to the indicators of financial aggregates, we have
made continuous improvements and adjustments. In recent years, specific quantitative
targets are set no more in our monetary policy for the growth rates of financial
aggregates, such as M2 and social financing. They have been replaced by qualitative
descriptions such as "being basically aligned with nominal economic growth".
The monetary and credit growth as needed by the real economy is also changing with
high-quality economic development and structural transformation. The changes in the
growth rates of monetary and credit aggregates essentially reflect the structural
changes in China's economy and the associated supply-side structural changes in
China's financial sector.
When we look at aggregates from a mathematical perspective, the growth rate is the
ratio of the current increase to the total existing amount, with the former being the
numerator and the latter the denominator. Currently, as the outstanding amount of
social financing in China has exceeded RMB390 trillion and M2 stands at over RMB300
trillion, China's macro financial aggregates are huge. However, we should be aware
that many of the existing loans are being used with low efficiency, mobilizing such loans
is essentially as significant to economic growth as issuing new loans.
In terms of the changes in the credit structure, of the outstanding loans totaling almost
RMB250 trillion, real estate loans and local financing vehicle loans account for a large
share, which is declining rather than expanding. Only after having offset the decline,
can the increase in other loans be reflected. As a result, it is quite difficult to maintain an
overall credit growth of over 10 percent as seen in the past.
The measurement of money supply should also be improved constantly to adapt to the
changing situation. China's statistical coverage for M1 was set 30 years ago. With the
facilitation of financial services and the rapid development of financial markets and
financial innovations such as mobile payment, major changes have taken place to the
range of financial products that meet the statistical definition of money supply,
particularly that of M1, entailing dynamic improvements to the statistical coverage of
money supply. Judging by the functions of money, we should work on incorporating in
M1 statistics personal demand deposits and some highly liquid financial products, which
can be even used to make direct payments, so as to better present a true picture of
money supply.
We can also continue to refine intermediate variables for monetary policy, and gradually
weaken our focus on quantitative targets. When the growth of money and credit has
pivoted from supply constraints to demand constraints, it obviously runs against the law
of economic performance if the emphasis remains on quantitative growth, or even "the
obsession with aggregates" exists. Financial aggregates are to be viewed more as
indicators for monitoring, reference and projection, and the role of interest rates in
economic regulation should be more highlighted.
Second, we will further improve the market-based system for interest rate regulation.
We have liberalized interest rates in recent years, and basically set up a mechanism for
their formation, regulation, and transmission. From central bank policy rates to
benchmark market interest rates, and then to various financial market interest rates,
they witnessed relatively smooth transmission in general.
There is still room for improvement. For instance, a large variety of central bank policy
rates exist, and the relationship among the interest rates of various monetary policy
instruments is rather complex. Certain central bank's short-term operational rate can be
specified as the main policy rate, and the 7-day reverse repo rate basically fulfills this
function. Therefore, the interest rates on other monetary policy instruments with
different tenures may soften their roles as policy rates, and the transmission from
shortterm to long-term interest rates should gradually become smoother. Meanwhile,
continued efforts will be made to reform and improve the LPR. Targeting that some
LPRs significantly deviate from the actual prime rates for clients, the focus is on
improving the LPR to more truthfully reflect the level of interest rates on the lending
market.
Central banks usually use the interest rate corridor as a supportive resource in steering
short-term interest rates, "binding" money market interest rates into a certain range.
China's interest rate corridor has now taken initial shape, with the SLF rate as a ceiling
and the rate on excess reserves as a floor. The width is relatively large, which is helpful
to leverage the role of market in pricing and stays resilient and flexible enough.
Recent movements of money market interest rates show that market interest rates have
been running stably around policy rates, with significantly narrowed fluctuations. If we
give greater play to the role of interest rate regulation in the future, we need, and we
have the condition to signal a clearer target to assure the market. In addition to the
clarification of the main policy rate, an appropriately narrowed interest rate corridor may
also be needed.
Third, we will gradually include the purchase and sale of China government bonds on
the secondary market in our toolkit. Recently, the market has paid more attention to
this. We have been enriching and improving our methods for the injection of base
money. And over a certain period in the past, the injection was passive through funds
outstanding for foreign exchange. Since 2014, as such funds declined in amount, we
have acted proactively to inject base money through open market operations and MLF,
among other tools.
In recent years, the size and depth of China's bond market enhanced with the rapid
development of its financial market. So the conditions have been mature for the central
bank to inject base money through the purchase and sale of China government bonds
on the secondary market. It was noted at last year's Central Financial Work Conference
that we should enrich our monetary policy toolkit and gradually include China
government bond buying and selling in open market operations. The PBOC is now
increasing communication with the Ministry of Finance to promote joint research on the
implementation. The whole process is gradual, and the research on how to improve the
issuance pace, term structure, and depository system for China government bonds is to
be conducted at the same time.
It should be noted that including China government bond buying and selling in the
monetary policy toolkit does not mean quantitative easing. Instead, it is meant to be a
channel for base money injection and a tool for liquidity management. The China
government bond transaction, both sale and purchase, will play its role together with
other tools and create a suitable liquidity environment.
Rapid development of the financial market poses new challenges to the central banks.
The failure of Silicon Valley Bank reveals that central banks need to observe and
evaluate the financial market situations from a macro-prudential perspective, and
correct and intercept the accumulation of market risks in a timely manner. At present,
central banks should give special attention to maturity mismatch and interest rate risks
arising from the large holding of medium- and long- term bonds by non-banking
institutions, aiming to maintain an upward sloping yield curve and to help the market
provide positive incentives for investment.
Fourth, we will improve the structural monetary policy instrument system which is
precise and moderate. Traditionally speaking, the monetary policy adjusts aggregate.
However, many problems and challenges in China's economic development are
structural. If they are not properly solved, the effectiveness of aggregate adjustment will
be restricted. Around the world, since the global financial crisis, especially in response
to COVID-19 in 2020, central banks in the major economies, such as the US and the
euro zone have launched a series of structural monetary policy instruments targeted for
specific areas, entities and purposes.
We have been exploring how to leverage the guiding role of structural monetary policy
instruments. And we have accumulated some experience and good practices in the
process. For instance, structural monetary policy instruments should follow the principle
of remaining targeted, reasonable, moderate, and flexible, and they are expected to be
complementary to the aggregate instruments. By incorporating incentive mechanisms
into the structural instruments, we guide financial institutions to optimize credit
structures in a market-oriented way while guarding against moral hazards.
In the future, when using structural monetary policy instruments, we will continue to
properly use and enrich the experience we have accumulated and improve relevant
institutional frameworks. We will appropriately manage the scale of structural
instruments and withdraw those that have reached their temporary goals in a timely way.
Fifth, we will enhance the transparency of monetary policy and improve the policy
communication mechanism which is reliable, regular, and institutionalized so as to
ensure effective policy communication and expectation guidance. An important feature
of the modern monetary policy framework is that central banks can communicate with
the market and the public about policy considerations and prospects in a transparent,
clear, and timely manner. Enhanced transparency will make policies more
understandable and authoritative, and the market will hence have a stable expectation
for the policy trend in the future and adjust its decision-making accordingly. In this way,
monetary policy adjustments will achieve multiplier effects. My speech today is exactly
an effort towards this goal and we will make continuous effort to do a good job in central
bank communication.
Last but not least, I'd like to wish 2024 Lujiazui Forum a complete success. Thank you.