What Are The New Highlights Of China's Monetary Policy?

We systematically reviewed the central bank. monetary policy The scope and evolution of goals, policy tools and transmission mechanisms, and the differences between the Central Bank of China and other major central banks of the world, including the Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England.

　　 Our conclusion is:

1) the Central Bank of China, like other central banks, has set multiple targets. The priorities of these policy objectives will be adjusted from time to time, and the Central Bank of China will use a variety of policy tools to achieve these goals.

2) in view of structural reforms and slowing capital inflows, the Central Bank of China tends to use directional regulation policies to inject liquidity into the financial system rather than traditional policy tools such as interest rate cuts.

3) we expect China Central Bank It will more flexibly combine directional easing tools with interest reduction and reduction measures to ensure macroeconomic stability and promote structural balance.

In a short period of time, the PBOC may still remain at the forefront of the global central bank's fight against "low inflation".

Over time, we believe that the Central Bank of China will gradually turn to a market-oriented price mechanism. In contrast to our analysis of the evolution of other central banks, we believe that the Central Bank of China has a long way to go from "inflation targeting", and that China's financial reform and economic development will enable the Central Bank of China to use more price instruments.

Monetary policy framework: what has changed? Why?

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Economic policy towards Government management The state is an important tool. In order to govern the country more efficiently, the central government used to rely mainly on the appointment of government officials and the promulgation of economic policies to manage local governments. Between economic overheating and recession, China's top policymakers are well aware of how to shift their focus between monetary policy and fiscal policy. For decades, policymakers have found that monetary policy is more powerful in tightening credit and curbing inflation, and fiscal stimulus is the easiest way to boost economic growth.

But there have been many changes since 2013. The new government is more inclined to use monetary policy to achieve the goal of structural adjustment and counter cyclical adjustment. The most significant change is that after 2012 economic slowdown, the new government decided to use monetary policy tools to reduce the cost of financing to promote investment growth, rather than fiscal stimulus. In our view, this change is affected by the fiscal reform that rationalize the relationship between the central and local governments, and reflects the policy innovation to avoid repeating the 2008 four trillion stimulus plan.

With the help of more innovative tools, the Central Bank of China has launched monetary easing. Before the rate cut in November 21st, the people's Bank of China (PBOC) had deliberately avoided introducing high-profile easing measures, such as cutting interest rates or lowering interest rates. The Central Bank of China is worried about the accusations of overstimulation, so it has begun to launch a series of new directional easing tools, which will enable the central bank to better control loose time, volume and capital flows. The monetary authorities seem to have fallen into a dilemma of "overall easing and steady growth" or "directional easing adjustment".

What has changed? What has not changed? China's monetary policy framework has always had some specific characteristics. However, we need to understand the history and background of the evolution of the monetary policy of the Central Bank of China, so as to better evaluate the position of monetary policy and make reasonable investment decisions. In this report, we systematically review the scope and evolution of the central bank's monetary policy objectives, policy tools and transmission mechanisms. At the same time, we try to put the central bank's policy framework in an international context and compare its differences from other major central banks in the world, including the Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England.

　　 Our conclusion is:

1) the Central Bank of China, like other central banks, has set multiple targets. The priorities of these policy objectives will be adjusted from time to time, and the Central Bank of China will use a variety of policy tools to achieve these goals.

2) in view of structural reforms and slowing capital inflows, the Central Bank of China tends to use directional regulation policies to inject liquidity into the financial system rather than traditional policy tools such as interest rate cuts.

3) we expect the Central Bank of China to more flexibly combine directional easing tools with interest reduction and reduction measures to ensure macroeconomic stability and promote structural balance.

The Central Bank of China has chosen to achieve multiple goals through targeted easing measures. These include steady growth, structural adjustment and deleveraging. In spite of the decline in economic growth, the potential economic growth rate (which means smaller output gap) and lower employment pressure mean that the central bank does not need to implement strong stimulus. At the same time, a decrease in capital inflows and a balance of payments means that the central bank must seek other ways to put the underlying currency.

Even so, directional easing can not replace the interest rate cut in reducing financing costs. Especially considering the opacity of such measures and the limitations of releasing the policy signals. When combined with interest rate cuts, the purpose of monetary easing is very clear, that is, to reduce the borrowing cost of the real economy, reduce the formation speed of non-performing loans, and further promote financial stability. At the same time, relaxing the combination of interest rate control and fiscal reform can eliminate the soft budget constraint, which is the key reason why state-owned enterprises and local governments are not sensitive to interest rates, and then improve the effectiveness of monetary policy transmission through interest rates.

We expect that the Central Bank of China will gradually shift to a market-oriented price mechanism. In contrast to our analysis of the evolution of other central banks, we believe that the Central Bank of China has a long way to go from "inflation targeting", and that China's financial reform and economic development will enable the Central Bank of China to use more price instruments.