The present is ideal
Interpretation of the 21Q4 Monetary Policy Implementation Report
Dr. Qin Tai Chief Macro Analyst, CFA
Shenwan Hongyuan Macro
Main content
The total amount of the original source is the first, and the initiative is taken to promote credit. In this report on the implementation of monetary policy, there are many places that highlight the aggregate rather than structural role of monetary policy. The most prominent point is that in the current round of stable growth, the central bank has expressed its "proactive initiative" and required to give full play to the "dual functions of the total amount and structure of monetary policy tools", "increase cross-cycle adjustment", and pay attention to "sufficient force, precise force, and forward force". Maintaining the stable growth of the total amount of credit is the first priority, the central bank will strengthen the liquidity investment support of quantitative tools, and for the first time put forward "cultivating and stimulating the credit demand of the real economy" and "guiding financial institutions to effectively expand credit delivery", the target and operation of the volume is the first. The two columns highlight the stability of the growth of total credit and the logic of maintaining the basic stability of the macro leverage ratio, and strengthen the overall goal of stable growth and high-quality development this year from the technical level, the central bank will focus on maintaining the reasonable growth of monetary credit throughout the year and achieve a "good combination of stable total amount and excellent structure". In January, new credit and social financing ushered in a full-fledged "opening red", and the financing of real estate infrastructure was well guaranteed, becoming a good model for the credit structure of the whole year.
Structural tools have weakened, emphasizing "addition". While emphasizing the overall significance of monetary policy, the structural promotion effect of tools such as refinancing and rediscounting that was prominently elaborated in the past on the loans of private small and micro enterprises has actually weakened significantly in this report. Structural monetary policy tools require active "addition". The highly anticipated carbon reduction tool given in the previous report weakened in this report to "support the economy's transition to green and low carbon while ensuring security of energy supply" and highlighted the slow pace of distribution. The column "Exploring Climate Risk Stress Testing" mainly conveys the conclusion that the dual-carbon target brings less pressure on the capital adequacy ratio of the banking system. We think this column is more of a "cold thinking" by central banks about green finance and the structural monetary policy tools associated with it.
Further clarify the monetary credit transmission mechanism with liquidity delivery to promote credit and policy interest rate as the operational objectives. Column 1 of the report further clarifies the monetary credit transmission mechanism of the central bank to promote credit growth with quantitative tool operation and the basic stability of the macro leverage ratio, with the 7-day reverse repo rate as the intermediary target. On the one hand, it verifies the correctness of the dynamic liquidity gap calculation and currency operation forecast method of the Shenwan Hongyuan macro team that has long started from the M2 growth rate, on the other hand, considering that the central bank is quite satisfied with the current interest rate target and the market interest rate level, it is still recommended to pay attention to the positive and enterprising trend of the number of operations throughout the year, and the probability of another interest rate cut during the year is not high. It also highlighted the smaller upward average macro leverage ratio for 2020-2021, indicating that stable leverage is not a constraint on expansion credit this year.
Promote the downward trend of lending rates, but mainly through cost dredging rather than rate cuts. The report's requirements for the decline in the financing cost of the real economy have deleted the previous restrictions on "small and micro enterprises", showing that under the dilemma of real estate financing difficulties since the third quarter of last year, stabilizing the normal financing of housing enterprises and the stable and healthy development of the real estate market has become an important goal. From the perspective of the way to reduce loan interest rates, from "continuous release of LPR reform potential" to "exert the efficiency of LPR reform", the focus is on controlling the cost of bank liabilities and reducing unreasonable charges, etc. Further reduction of LPR will exacerbate the regional differentiation of the real estate industry, amplify the risks of the real estate industry, and further reduce the possibility of LPR.
Overseas currency tightening has accelerated, and the RMB exchange rate can be buffered by two-way fluctuations. Although the pace of austerity in advanced economies continues to accelerate, the good resilience of China's export industry chain and the cautious overseas financing activities of Chinese enterprises after 2015 are acting as two major buffers for the divergence of Sino-US monetary policy, and the independent adjustment of the exchange rate is also conducive to stabilizing the balance of payments, and the need for passive tightening on the mainland is not strong. The central bank emphasizes "adhering to market supply and demand" and "enhancing the flexibility of the RMB exchange rate", and the two-way fluctuation of the RMB exchange rate is also conducive to stabilizing the balance of payments, without the large outflow of foreign reserves in 14-16 years.
The disposal of financial risks has achieved important results, and stable growth at this stage is the biggest risk prevention. The report gives sufficient affirmation to the important results achieved in the early stage of risk resolution, showing that the prevention and control of structural and local risks in 2022 may not be significantly enhanced compared with the past two years, and the macro financial risks of the total significance are emphasized, and stable growth at this stage is risk prevention.
The following is the main text
1. The total amount of the original source is the first, and the initiative is taken to promote credit
In this report on the implementation of monetary policy, there are many places that highlight the aggregate rather than structural role of monetary policy. The most prominent point is that in the current round of stable growth, the central bank has expressed its "proactive initiative" and required to give full play to the "dual functions of the total amount and structure of monetary policy tools", "increase cross-cycle adjustment", and pay attention to "sufficient force, precise force, and forward force". In the past three or five years, with the fundamental transformation of the mainland's monetary policy transmission mechanism from the original "great opening and closing" to "steady and neutral", the monetary policy implementation report has long formed a writing style that focuses on structural tools and transmission and weakening the overall effect of monetary policy. However, in the monetary policy implementation report of the fourth quarter of 2021 just released, the most prominent feature we have seen is that it is clear from the source and returns to the narrative of the total amount first, which has important guiding significance for understanding that the steady growth of monetary policy this year will mainly rely on the active operation of aggregate and quantitative monetary policy tools, including RRR cuts, MLF, etc. (rather than the quantitative tool operations that take into account the total amount and structure such as refinancing and rediscounting in the past two years). As described in the overall position added in this monetary policy report, in the face of the triple pressure at the macroeconomic level, the central bank for the first time said that it should "actively implement the spirit of the Central Economic Work Conference and increase support for the real economy", "give full play to the dual functions of the total amount and structure of monetary policy tools", "pay attention to sufficient force, precise force, and forward force", and "neither engage in 'flood irrigation', but also meet the reasonable and effective financing needs of the real economy".
Maintaining the stable growth of the total amount of credit is the first priority, the central bank will strengthen the liquidity investment support of quantitative tools, and for the first time put forward "cultivating and stimulating the credit demand of the real economy" and "guiding financial institutions to effectively expand credit delivery", the target and operation of the volume is the first. At present, the downward pressure on domestic aggregate demand is mainly reflected in the real estate field, the growth rate of residents' demand for housing is relatively low, real estate development financing is blocked, corporate risk exposure, bank risk appetite is downward, and real estate investment and land transactions have cooled down significantly. Monetary policy has a direct regulatory effect on the overall financing of the real estate industry chain, residential housing loans and real estate development loans account for half of the mainland's medium- and long-term loans, "maintaining the reasonable growth of monetary credit" is the first priority in the current monetary policy aggregate target. In terms of specific operations, the report has a rather positive and enterprising attitude towards promoting credit growth, not only adding a detailed introduction to the quantitative tool measurement framework of "strengthening the monitoring and analysis of uncertain factors such as fiscal revenue and expenditure, government bond issuance, cash withdrawal and monetary policy adjustment in major economies, and comprehensively using a variety of monetary policy tools to maintain reasonable and sufficient liquidity", but also points out that it is necessary to "continue to alleviate the three major constraints on liquidity, capital and interest rates of bank credit supply", and even for the first time put forward "cultivating and stimulating the credit demand of the real economy" for the first time guide financial institutions to vigorously expand credit delivery."
The two columns highlight the stability of the growth of total credit and the logic of maintaining the basic stability of the macro leverage ratio, and strengthen the overall goal of stable growth and high-quality development this year from the technical level, the central bank will focus on maintaining the reasonable growth of monetary credit throughout the year and achieve a "good combination of stable total amount and excellent structure". Box 2, "Enhancing the Stability of Aggregate Credit Growth," said, "Give play to the dual functions of monetary policy tools as both aggregate and structural." Structural monetary policy tools actively do a good job of 'addition'", the significance of the total amount has been emphasized again, the next stage should "increase the intensity of cross-cycle adjustment", "maintain reasonable and sufficient liquidity, enhance the stability of the growth of total credit, and maintain the growth rate of money supply and social financing scale and the nominal economic growth rate basically match". For the monetary policy of the past two years, the central bank said in column 3 "The mainland's macro leverage ratio remains basically stable" that "since the epidemic, the mainland has supported the rapid recovery of economic growth with relatively small new debts, and the increase in macro leverage ratio is relatively not high", "it has created conditions for continuing to maintain the basic stability of macro leverage ratio in the future", and re-emphasized "increasing cross-cyclical adjustment and enhancing the stability of total credit growth", and the reasonable growth of monetary credit in 2022 can be expected.
In January, new credit and social financing ushered in a full-fledged "opening red", and the financing of real estate infrastructure was well guaranteed, becoming a good model for the credit structure of the whole year. In January, the new credit and new social financing reached 3.98 trillion yuan and 6.17 trillion yuan respectively, both of which hit a record high in a single month, and still increased by 400 billion yuan and nearly one trillion yuan respectively on the basis of a very high base year-on-year, achieving a hard-won credit "opening red", sweeping away the haze of market expectation divergence since the beginning of the year. In terms of credit, the rapid improvement of corporate medium and long-term loans is the most eye-catching, with a single month of new up to 2.1 trillion yuan, compared with the ultra-high base of 2.04 trillion yuan in the same period last year, there is still a increase of 60 billion yuan, the average perspective of the two years, has increased from 21Q4 to more than 23 billion yuan, a one-stroke reversal to an increase of 220 billion, in addition, the total number of off-balance sheet entrustment and trust loans in the social financing caliber was only reduced by 25.2 billion yuan in a single month, not only did not further aggravate the real estate financing due to the official landing of the new asset management regulations, but also reduced by about 50 billion yuan year-on-year. It shows that off-balance sheet real estate financing channels also have a considerable degree of smooth effect at the beginning of the year. The net financing of corporate bonds has picked up significantly, and driven by the advance issuance of special bonds, these two strong performances have provided more adequate financing support for infrastructure investment in the first half of the year.
2. Structural tools have weakened, emphasizing "addition"
While emphasizing the overall significance of monetary policy, the structural promotion effect of tools such as refinancing and rediscounting that was prominently elaborated in the past on the loans of private small and micro enterprises has actually weakened significantly in this report. Structural monetary policy tools require active "addition". Signals of new refinancing rediscount structured instruments were not disclosed, and existing instruments were not highlighted, but only the refinancing rediscounting instruments that explicitly support small and micro enterprises were converted into standing instruments, aiming to avoid market concerns about tighter liquidity due to the contraction of refinancing balances. In addition, in the part of the traction and driving role of structural tools, the new emphasis is placed on "guiding financial institutions to increase credit delivery to areas with slow credit growth", which actually emphasizes the total role of refinancing and rediscounting tools, further weakening its structural orientation. The new "continue to promote the 'increment, price reduction and expansion' of inclusive small and micro loans", especially the requirement of expansion, is actually a hint to enhance the total meaning of refinancing rediscounting tools and weaken the structural role.
The highly anticipated carbon reduction tool given in the previous report weakened in this report to "support the economy's transition to green and low carbon while ensuring security of energy supply" and highlighted the slow pace of distribution. The column "Exploring Climate Risk Stress Testing" mainly conveys the conclusion that the dual-carbon target brings less pressure on the capital adequacy ratio of the banking system. The report discloses that the two tools to support carbon emission reduction and the special refinancing tool to support the clean and efficient use of coal were only 85.5 billion yuan and 2.7 billion yuan in the fourth quarter, respectively, with a total of only 88.2 billion yuan. Among them, the former's tool is also refinancing, but the scale of the plan was not announced at the time of creation (in fact, the specific creation time was not announced, no later than November), which once triggered speculation on whether the scale was large, and the new scale announced by the latter was 200 billion. However, from the perspective of operation, it can be said that it is significantly lower than the market expectation of the scale of investment, on the one hand, it shows that the refinancing and rediscounting tool as a base currency delivery tool, as we have analyzed many times before, has obvious slow operation speed and easy to cause expectations of inefficiency problems; on the other hand, it also fully shows that after the Central Economic Work Conference emphasized that the double carbon target is "impossible to work in one battle", based on the basic national conditions of "coal-based", the central bank also adjusts the order of the monetary policy toolbox accordingly. More emphasis is placed on "supporting the economy's transition to green and low-carbon while ensuring the security of energy supply", rather than "exerting the policy demonstration effect a quarter ago, encouraging social funds to invest more in green and low-carbon fields, and helping to achieve carbon peaks and carbon neutrality goals". The core logic of Box 5 "Exploring the Development of Climate Risk Stress Testing" is to measure the high-emission industries if the future emission costs increase year by year, the profitability of enterprises declines, resulting in the probability of commercial banks defaulting on their loans, resulting in the risk of capital loss of commercial banks, and concluding that "the proportion of loans from the thermal power, steel and cement industries of participating banks is not high, and the overall capital adequacy ratio can meet regulatory requirements under three pressure scenarios". and a "cold reflection" on the structural monetary policy tools associated with it.
3. Further clarify the monetary credit transmission mechanism with liquidity investment to promote credit and policy interest rate as the operational objectives
Column 1 of the report further clarifies the monetary credit transmission mechanism of the central bank to promote credit growth with quantitative tool operation and the basic stability of the macro leverage ratio, with the 7-day reverse repo rate as the intermediary target. On the one hand, it verifies the correctness of the dynamic liquidity gap calculation and currency operation forecast method of the Shenwan Hongyuan macro team that has long started from the M2 growth rate, on the other hand, considering that the central bank is quite satisfied with the current interest rate target and the market interest rate level, it is still recommended to pay attention to the positive and enterprising trend of the number of operations throughout the year, and the probability of another interest rate cut during the year is not high. Box 1 "Banking System Liquidity Influencing Factors and Central Bank Liquidity Management" first pointed out that "the liquidity of the banking system mainly refers to the excess reserves deposited by financial institutions in the central bank", excess reserves and excess reserves are the final result of money supply and money demand, and the factors affecting the excess reserve rate are medium and long-term factors (trend growth in cash demand, stable increase in government deposits, statutory deposit reserves, reserves, etc.) and short-term factors (short-term fluctuations caused by fiscal deposits such as tax periods and government expenditures). Holiday cash injections, etc.), therefore, "some long-term and short-term influencing factors cannot be simply added to calculate the liquidity surplus, let alone the expiration of monetary policy tools as a factor affecting the liquidity of the banking system, and the degree of liquidity tightness can be judged by this." "In fact, the observation model proposed by the central bank is also the basic framework for us to measure the liquidity gap and make quantitative predictions for the operation of the central bank's quantitative tools, and the detailed algorithm is welcome to refer to the detailed elaboration in "Temperature Neutrality : Monetary Policy Analysis Framework and 2022 Outlook" (2021.11.22). The central bank also pointed out that the most intuitive indicator of market liquidity observation is the interbank market funding rate, especially DR007. Until a downward trend in the DR007 pivot is observed, we don't think further rate cuts are likely. After the intermediary goal of DR007, the ultimate goal of monetary policy is still to ensure the amount of credit expansion, to ensure that M2 and social financing growth rate and nominal GDP growth rate basically match, to maintain the macro leverage ratio is basically stable, these two quantitative targets, the report also pointed out that "the mainland macro leverage ratio at the end of 2021 is 272.5%, 7.7 percentage points lower than the end of the previous year", also belongs to the range of "maintaining the macro leverage ratio is basically stable", It also highlights that the average macro leverage ratio in 2020-2021 is relatively small, in fact, on the one hand, it highlights that the credit expansion speed as the target of monetary policy this year has considerable flexibility in the round space, on the other hand, it also implies that even if the credit expansion growth rate this year is slightly higher than the nominal GDP growth rate, it is still closer to the requirement of "macro leverage ratio remaining basically stable" than the large leverage period in consecutive years before 2017, showing that stable leverage is not a constraint on expansion credit this year.
4. Promote the downward trend of loan interest rates, but mainly through cost dredging rather than interest rate cuts
The report's requirements for the decline in the financing cost of the real economy have deleted the previous restrictions on "small and micro enterprises", showing that under the dilemma of real estate financing difficulties since the third quarter of last year, stabilizing the normal financing of housing enterprises and the stable and healthy development of the real estate market has become an important goal. The report emphasizes "promoting the reduction of the comprehensive financing cost of enterprises", rather than the previous "promoting the stabilization and decline of the comprehensive financing cost of small and micro enterprises", showing that in the third quarter of last year, due to the strict implementation of the third line and the four gears, the risk exposure of the real estate industry chain made real estate enterprises face financing difficulties and the problems that may be brought about by the upward cost of financing, and have also received further attention. The description of the real estate industry is also strengthened from the third quarter of "cooperating with relevant departments and local governments to jointly maintain the stable and healthy development of the real estate market and safeguard the legitimate rights and interests of housing consumers" to "safeguarding the legitimate rights and interests of housing consumers, better meeting the reasonable housing needs of home buyers, and promoting the healthy development and virtuous circle of the real estate market." "It also shows that the central bank is more proactive in solving the financing problem of housing enterprises, and the follow-up financing of the real estate industry chain is expected to continue to be cared for."
From the perspective of the way to reduce loan interest rates, from "continuous release of LPR reform potential" to "exert the efficiency of LPR reform", the focus is on controlling the cost of bank liabilities and reducing unreasonable charges, etc. Further reduction of LPR will exacerbate the regional differentiation of the real estate industry, amplify the risks of the real estate industry, and further reduce the possibility of LPR. "Giving full play to the LPR reform" is more about controlling the LPR plus point, focusing on controlling the cost of bank liabilities, including reducing the MLF interest rate, reducing the RRR, and "supervising the implementation of regulatory measures to optimize the deposit interest rate and standardize the order of the deposit market competition", rather than further reducing the LPR, and Column 2 also mentions controlling the financing costs of enterprises by reducing fees. We believe that since the financing of the real estate industry chain has shown a warming momentum, the probability of subsequent policies such as interest rate cuts will be greatly reduced, because this environmental interest rate reduction may once again bring signs of overheating of the real estate bubble in first- and second-tier cities, as well as the structural selling pressure in third- and fourth-tier cities, which is quite dangerous for the central bank.
5. Overseas currency tightening accelerates, and the RMB exchange rate can be buffered by two-way fluctuations
Although the pace of austerity in advanced economies continues to accelerate, the good resilience of China's export industry chain and the cautious overseas financing activities of Chinese enterprises after 2015 are acting as two major buffers for the divergence of Sino-US monetary policy, and the independent adjustment of the exchange rate is also conducive to stabilizing the balance of payments, and the need for passive tightening on the mainland is not strong. The report pays more attention to the tightening of monetary policy in external developed economies, due to high overseas inflation, "the impact of macro policy shifts in major developed economies is an important external uncertainty in 2022", "the Fed's policy of 'reducing bond purchases - raising interest rates - shrinking balance sheets' has a clear route, tightening statements exceeding market expectations; the Bank of England has raised interest rates twice in a row, the European Central Bank has also announced a slowdown in the speed of bond purchases, and the monetary policy of developed economies has generally turned", and looking forward to follow-up, Inflationary pressures in advanced economies have been at levels rarely seen in many years, and market inflation expectations are still strong, so policymakers need to pay close attention to the risk that inflation expectations may be de-anchored to prevent expectations from divergeing.", the pace of monetary tightening in advanced economies may still accelerate. We expect the Fed to likely raise rates 7 times in 2022. However, in the third quarter monetary policy implementation report, column 3 "Monetary Policy Adjustment and Response of Developed Economies" has pointed out that "the current internal and external environment facing the mainland is obviously different from the previous round, and the policy adjustment of developed economies has limited impact on me." "The good resilience of the export industry chain and the obvious restraint of the mainland from external financing after the epidemic have enabled the mainland central bank to maintain considerable concentration when it fully expects overseas tightening." In column 1 , "The mainland's macro leverage ratio remains basically stable" also pointed out that the mainland's macro leverage ratio "increased by 11.4, 17.2 and 7.3 percentage points lower than that of the United States, Japan and the euro area respectively", "the increase in macro leverage ratio is relatively not high", and the restrained monetary policy operation after the epidemic and the strong support of strong exports on foreign exchange reserves provide sufficient space for resisting external shocks, "concentrating on doing their own things" and "focusing on me".
In terms of exchange rate, the central bank emphasizes "adhering to market supply and demand" and "enhancing the flexibility of the RMB exchange rate", and the two-way fluctuation of the RMB exchange rate is also conducive to stabilizing the balance of payments, without the large outflow of foreign reserves in 14-16 years. In the next phase of the monetary policy outlook, the report said that "adhere to the market supply and demand-based, with reference to a basket of currencies for adjustment, managed floating exchange rate system, enhance the flexibility of the RMB exchange rate, play the role of exchange rate adjustment macroeconomic and balance of payments automatic stabilizer." "The central bank has no intention of maintaining the RMB exchange rate at an excessively high level, and two-way fluctuations are also conducive to the mainland's balance of payments situation being better than in 14-16 years, in this sense, the need for the mainland to follow overseas austerity is not strong."
6. Important results have been achieved in the disposal of financial risks, and stable growth at this stage is the biggest risk prevention
The report gives sufficient affirmation to the important results achieved in the early stage of risk resolution, showing that the prevention and control of structural and local risks in 2022 may not be significantly enhanced compared with the past two years, and the macro financial risks of the total significance are emphasized, and stable growth at this stage is risk prevention. Box 6 "Important Results in Preventing and Resolving Major Financial Risks" pointed out that important results have been achieved both in stabilizing the macro leverage ratio, as well as in dealing with high-risk financial institutions and rectifying financial chaos, "shadow banking risks have converged significantly", "the transition period of the new asset management regulations ended as scheduled at the end of 2021, the scale of asset management products has increased steadily, the structure has been continuously optimized, the proportion of net worth products has increased significantly, and the risks have converged significantly", "The hidden risks of shadow banking systemic risks have weakened significantly". From the data point of view, the off-balance sheet three items of the social financing caliber will shrink by 1.3 trillion yuan and 2.7 trillion yuan in 2020 and 2021 respectively, and in the context of the important results that have been achieved in the previous period, this compression may not be significantly increased in 2022, providing marginal support for off-balance sheet financing of real estate enterprises. When looking forward to the next stage of monetary policy operations, the report said that it is necessary to "strengthen the supervision of systemically important financial institutions, accelerate the promotion of global systemically important banks on the mainland to establish and improve the long-term mechanism for the management of total loss absorption capacity, and effectively improve the risk resilience", showing that macro financial risks in the aggregate sense have become the focus of future work. At present, the real estate industry chain, as the center of domestic demand, continues to be weak in domestic demand, and the economy is still facing downward pressure, and stable growth is the biggest risk prevention.
The content is excerpted from Shenwan Hongyuan Macro Research Report:
"The Present is the Ideal State - Interpretation of the 21Q4 Monetary Policy Implementation Report"
Securities Analyst: Qin Tai
Intern Yibin Shao also contributed to this report
Release date: 2022.02.13