The current monetary policy implementation report [1] points out that it is necessary to scientifically understand that the relationship between credit and economic growth tends to be weakened, and that "the current money stock is already quite large", and that more emphasis should be placed on improving quality and efficiency, optimizing structure, policy coordination, and smooth transmission. Regulatory idling could help narrow credit spreads. In terms of policy objectives, the central bank has placed more emphasis on rising inflation and exchange rate stability. In fact, we believe that fiscal policy may be more conducive to inflation and exchange rate recovery, and the easing of problems such as the real estate market and local debt will also help. China's interest rate system may enter a period of structural adjustment from a broad-spectrum downward trend, and the downward trend in financing costs and the phased slight rise in some interest rates may exist at the same time.
The report clearly points out that the aggregate of money and credit is not simply positively correlated with inflation and growth, and that too much attention should not be paid to the aggregate of money and credit. The monetary policy report for the fourth quarter of 2023 clearly stated that it is necessary to weaken the excessive focus on credit increment, and in this monetary policy implementation report, the central bank further clarified the relationship between the total amount of money and credit and the growth of inflation. In terms of the relationship between credit and growth, the report proposes that "the relationship between credit growth and economic growth in mainland China tends to weaken"[2], and further confirms this view through regional comparison: in 2023, the average growth rate of loans in one region will be 11.4%, and the average GDP growth rate will be 5%, while the average growth rate of loans in another region will only be 3.3%, but the average GDP growth rate will also be 4.8%. In terms of money and inflation, the central bank clearly pointed out that "the fundamental cause of the current low price level is the insufficient demand and imbalance between supply and demand in the real economy, rather than the insufficient money supply"[2].
► Column 1 proposes to scientifically understand that the relationship between credit and growth tends to weaken, avoid one-sided pursuit of scale, and pay more attention to quality and efficiency. The PBOC pointed out [2] that China is currently undergoing "structural adjustment and transformation" of the economy, and may gradually move towards a "virtuous alternative to direct financing" in the future. Our understanding is that in this process, the real estate, local financing platforms, and heavy industry sectors that are highly dependent on credit have slowed down, the service sector has not been highly dependent on credit, and the science and technology enterprises have become more dependent on direct financing. At the same time, the central bank pointed out that "when the scale of credit stock is relatively large, the marginal effect of continuing to increase credit supply is diminishing". Our understanding is that if credit is excessively allocated, it will make it difficult for inefficient enterprises to exit, which is not conducive to the effective allocation of resources.
► Column 2 emphasizes that the current situation is not a shortage of money supply, but a lack of liquidity. The central bank pointed out in column 2 that "the current money stock is already quite a lot"[2], but the structural problems are prominent: from the perspective of "where does the money go", loans are mainly invested in enterprises and the supply side, while consumer demand is still insufficient; From the perspective of "where is the money", the deposits are mainly retained in the household sector and are not converted into corporate deposits through household expenditure, which also reflects that "household consumption needs to be recovered and aggregate demand is insufficient"[2]. The central bank emphasized that "support the joint efforts of policies" to "better realize that residents dare to consume, enterprises are willing to invest, and the government can support the bottom". In our view, although structured credit instruments can play a quasi-fiscal role in helping structural transformation, they still focus on corporate investment and the supply side, and enterprises do not represent the final demand, and fiscal efforts are still needed to support household consumption and alleviate the contradiction between supply and demand.
As a result, central banks are likely to place more emphasis on regulatory "idling", and the policy effect may be reflected in the reduction of credit spreads. The Monetary Policy Implementation Report clearly states that "pay close attention to the situation of capital precipitation and idling, and promote the improvement of the efficiency of capital use"[2], which means that the central bank may cooperate with other departments to improve the efficiency of fund use through more regulatory means. As can be seen from the press conference of the State Administration of Financial Supervision [3], these measures may include strengthening the concentration supervision of credit granting, preventing excessive concentration of financial resources to a single large customer, and further improving the joint credit mechanism to prevent multiple banks from granting duplicate credit to the same enterprise. We believe that this kind of regulation may prompt banks to focus more on developing new customers and serving SMEs, which may be conducive to the narrowing of SME credit spreads and the decline of private financing interest rates.
In terms of monetary policy objectives, more attention is paid to the recovery of inflation and exchange rate stability. In the summary part of the monetary policy implementation report, it is clearly stated that "maintaining price stability and promoting a moderate recovery in prices are important considerations for grasping monetary policy"[1]. The PBOC uses two "resolute" in the expression of the exchange rate, namely "resolutely correcting pro-cyclical behavior" and "resolutely guarding against the risk of exchange rate overshoot"[1], which clearly expresses the importance it attaches to the exchange rate. The reason why exchange rate stability is so important is related to the central bank's judgment of the global environment. In this monetary policy implementation report, the central bank proposed that "the timing of the Fed's interest rate cut may be delayed", while the last statement was that "the interest rate hike cycle of major advanced economies is nearing the end"[4], and the report also pointed out that "global financial risks still need attention"[2], which did not appear in the last quarter's monetary policy implementation report.
In our view, fiscal strength is more conducive to supporting inflation and exchange rates, while the easing of problems such as the real estate market and local debt will also help. If interest rates are cut to raise inflation, the exchange rate may come under some pressure; And if the exchange rate is maintained and interest rates are raised, it may not be conducive to the recovery of inflation. Therefore, the best way to balance inflation and exchange rates is fiscal expansion. At the same time, if the real estate market can improve to a certain extent and the process of local debt treatment is further clarified, it will also help promote the recovery of inflation and the stability of the exchange rate. In addition, in the summary part of this report, it is also clearly stated that "policy coordination and cooperation should be strengthened to keep prices at a reasonable level".
China's interest rate system may enter a period of structural adjustment from a broad-spectrum downward trend, and the downward trend in financing costs and the phased slight rise in some interest rates may exist at the same time. Judging from the ideas of this monetary policy implementation report, monetary policy pays more attention to "precision and effectiveness", and may have different effects on different interest rates. At the Politburo meeting, we proposed to "flexibly use policy tools such as interest rates and reserve requirement ratios" and "reduce the cost of comprehensive social financing"[5], and we expect that the decline in lending rates may continue, and there is room for deposit rates to be lowered. But at the same time, there may be some upside in some interest rates, such as the 30-year Treasury bond. The PBOC pointed out in column 4 that the decline in long-term government bond yields in the first quarter of this year "mainly reflects long-term economic growth and inflation expectations, but is also disturbed by factors such as the lack of safe assets". We also pointed out in our previous report "The Downward and Front-running of Interest Rates" that the interest rate level of long-end government bonds is at a historically low state, while the term spread is low from both horizontal and vertical perspectives, and there is a possibility of adjustment. In order to promote the recovery of inflation and the stability of the exchange rate, the next policy, whether fiscal expansion, other industrial or regulatory policies, may have the effect of supporting long-term government bond interest rates, and the central bank also pointed out that "the supply and demand of the bond market are expected to be further balanced, and the yield of long-term government bonds will be more compatible with the future economic upswing."
[1]http://www.pbc.gov.cn/zhengcehuobisi/125207/125227/125957/5347949/5347944/index.html
[2]http://www.pbc.gov.cn/zhengcehuobisi/125207/125227/125957/5347949/5347944/2024051109091110942.pdf
[3]https://www.cbirc.gov.cn/cn/view/pages/ItemDetail.html?docId=1149455&itemId=919
[4]http://www.pbc.gov.cn/zhengcehuobisi/125207/125227/125957/4883187/5238308/index.html
[5]https://www.gov.cn/yaowen/liebiao/202404/content_6948449.htm
Article source:
This article is excerpted from: "Dilute the Aggregate, Coordinate the Fiscal |", which has been released on May 12, 2024 Comments on the first quarter monetary policy implementation report》
周彭 分析员 SAC 执证编号：S0080521070001 SFC CE Ref：BSI036
黄文静 分析员 SAC 执证编号：S0080520080004 SFC CE Ref：BRG436
张文朗 分析员 SAC 执证编号：S0080520080009 SFC CE Ref：BFE988
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