Yi Gang delivered a keynote speech at the 2024 Financial Street Forum Annual Conference

Source: Financial Times

"The Third Plenary Session of the 20th Central Committee of the Communist Party of China proposed to 'accelerate the improvement of the central bank system and smooth the monetary policy transmission mechanism', which pointed out the direction for the next stage of central bank work." On October 18, Yi Gang, Chairman of the Council of the China Society for Finance and Banking and former Governor of the People's Bank of China, delivered a keynote speech on this topic at the 2024 Financial Street Forum Annual Conference of the People's Bank of China.

The following is the full text of the speech:

1. Improve the central bank system

The central bank is the center of the financial system, responsible for currency issuance, regulating money supply and circulation, and maintaining currency stability. regulate financial activities, promote financial reforms, and promote full employment and economic growth; Perform the function of lender of last resort, implement macro-prudential management, prevent and resolve systemic financial risks, and maintain the sound operation of the financial system.

The major strategic plan of the CPC Central Committee and the State Council to "further deepen reform in an all-round way and promote Chinese-style modernization" is also a higher requirement for the central bank to perform its duties, so it is necessary to continuously improve the central bank system and highlight the characteristics of the socialist market economy.

First, we must always adhere to the centralized and unified leadership of the CPC Central Committee and adhere to the people-centered approach. Finance is related to economic development and national security, and to the people's living and working in peace and contentment. The central bank should implement the line, principles and policies of the Party Central Committee to the letter, and efficiently implement the decisions and arrangements of the Party Central Committee.

The central bank must fully embody the people's nature and take continuously meeting the people's growing demand for high-quality financial services as the starting point and the end goal. The central bank should focus on improving the highly adaptable, competitive and inclusive financial system, protect the people's wallets, promote common prosperity with high-quality financial services, and constantly realize the people's yearning for a better life.

Second, it is necessary to adhere to the principles of marketization and rule of law. The essential attribute of finance is to carry out financing through contracts, which is an important form of market allocation of resources. The miracle of China's economic development since the beginning of reform and opening up has proved that the socialist market economy, which is mainly based on the market, is much more efficient than the planned economy, and the well-being of the broad masses of the people is much better.

The socialist market economy is essentially an economy governed by the rule of law. The rule of law economy is based on property rights and personality rights, and defines the boundaries between market entities, enterprises, and household consumers to operate and consume in accordance with the law, as well as the boundaries and norms of government functions. The advantage of a rule of law economy is that it can enable market players to form stable expectations, better mobilize enthusiasm and promote innovation.

The People's Bank of China Law stipulates that the People's Bank of China is the central bank of the mainland, independently formulating and implementing monetary policy, performing its duties and engaging in financial business activities under the leadership of the State Council. This shows that the People's Bank of China is a constituent department of the State Council and must operate in accordance with the principle of marketization and rule of law. In implementing monetary policy, it is necessary to guide market interest rates through the use of monetary policy tools and give full play to the decisive role of the market in the allocation of resources. In carrying out financial management and financial services and preventing and defusing financial risks, it is necessary to exercise administrative power in accordance with the law, protect property rights and the interests of the people in accordance with the law, and maintain the fair order of the market.

Third, we should always adhere to China's national conditions and actively learn from beneficial international practices. The People's Bank of China Law defines the central bank position of the People's Bank of China as a central bank that "formulates and implements monetary policy, prevents and defuses financial risks, and maintains financial stability". Since its establishment, the People's Bank of China (PBoC) has always adhered to China's national conditions and specific practices. To improve the central bank system, it is necessary to inherit this fine tradition, proceed from the mainland's national conditions, proceed from reality, and implement policies and measures conducive to long-term financial stability.

At the same time, in the process of development, global central banks have also formed a series of widely accepted rules of conduct, including: in order to maintain currency stability, central banks should have a certain degree of independence; When inflation or economic growth deviates from the target level, the central bank should flexibly adjust interest rates; To avoid moral hazard, the central bank must provide qualified collateral and charge an appropriate interest rate for re-lending; To prevent financial risk contagion, central banks can provide liquidity support to the financial system, among other things. The history of China and the world has fully proved that openness brings progress, while closure inevitably lags behind. In perfecting the central bank system, the mainland should also actively draw on the above-mentioned useful experiences, draw lessons from previous international financial crises, and continuously improve the effectiveness of the central bank in performing its duties.

2. Continuously optimize the monetary policy regulation and control framework and smooth the transmission mechanism

Monetary policy is the most basic and most important function of the central bank, and constantly optimizing the monetary policy regulation and control framework and smoothing the monetary policy transmission mechanism are important aspects of improving the central bank system.

(1) The evolution of the mainland's monetary policy regulatory framework

Looking back at the history of the central bank of the mainland, a very important event was the promulgation of the People's Bank of China Law in 1995, which provided a systematic and comprehensive legal basis for the central bank to perform its duties. Before 1995, the mainland mainly implemented a monetary policy framework based on quantitative regulation and control, and the central bank took money supply and credit scale as its main operational objectives, and sometimes directly managed the scale of bank credit and put forward specific control requirements for various interest rate levels.

Since 1995, the reform process of the mainland's monetary policy framework has advanced rapidly, and the central bank has gradually formed a complete system of monetary policy tools, such as open market operations, deposit reserves, and re-lending. During the decade from 1995 to 2005, when the exchange rate was the most important consideration in monetary policy, the exchange rate of the renminbi against the US dollar remained stable at 8.28 yuan per US dollar. This can be seen as an exchange rate-anchored policy framework. The central bank's balance sheet was expanded due to the foreign exchange appropriation, and we carried out hedging operations such as raising the statutory reserve ratio to "freeze" the excess liquidity of the foreign exchange appropriation. In terms of balance sheet size, the PBOC's balance sheet at the time was significantly larger than that of the central banks of several major advanced economies. This regulatory framework has effectively maintained the stability of the mainland's currency value, guarded against the risks of inflation and economic overheating, and contributed to the steady and healthy development of the economy.

On July 21, 2005, a major breakthrough was made in the reform of the exchange rate formation mechanism, when China began to implement a managed floating exchange rate system based on market supply and demand and adjusted with reference to a basket of currencies. Since then, the monetary policy framework has gradually shifted to a framework based on price control, that is, the monetary policy framework with interest rates as the core has been gradually established and implemented, supplemented by the consideration of quantitative indicators. The People's Bank of China (PBoC) has gradually withdrawn from normalized foreign exchange intervention, begun to use a variety of monetary policy tools to regulate money supply and liquidity levels, and gradually released the excess liquidity that was "frozen" in the past through RRR cuts, raising the currency multiplier and supporting more monetary credit growth with a basically stable central bank balance sheet.

(2) Smooth the monetary policy transmission mechanism with interest rate market-oriented reform

Interest rates are important macroeconomic variables, and interest rate liberalization is one of the core reforms in the economic and financial fields. Since the beginning of reform and opening up, the mainland has been steadily promoting the marketization of interest rates, establishing and improving an interest rate formation mechanism determined by market supply and demand, and the central bank has guided market interest rates through the use of monetary policy tools. After decades of continuous advancement, the mainland's interest rate market-oriented reform has achieved remarkable results, a relatively complete market-oriented interest rate system has been formed, and the yield curve has also become mature.

It is necessary to continue to further promote the market-oriented reform of interest rates, and strive to improve the mechanism for the formation and transmission of market-oriented interest rates. On the one hand, we will continue to improve the central bank's policy interest rate system. We will continue to consolidate the central bank's policy interest rate system, which uses the open market operation rate as the short-term policy rate, and strive to improve the interest rate corridor mechanism. On the other hand, we will continue to strengthen the cultivation of market benchmark interest rates. Expand the use of repo rate DR in financial products, and further consolidate the benchmark of DR. Continuously optimize the LPR quotation formation mechanism, and urge the quotation bank to improve the quality of quotation. Cultivate the yield curve of government bonds according to the principle of marketization.

(3) Give full play to the dual functions of monetary policy in terms of aggregate volume and structure

In general, monetary policy is a macro aggregate policy, and if the incentive mechanism is designed correctly, it can be supplemented by some structural functions. Structural monetary policy is a monetary policy that guides the flow of funds to specific areas of the economy through the design of appropriate incentive mechanisms on the basis of the allocation of resources by the market, and has the function of structural adjustment. In recent years, the mainland has further enriched the toolbox of structural monetary policy, giving full play to its precise drip irrigation function, and achieving good results, reducing the pressure of aggregate policy to a certain extent, and helping to enhance the autonomy and effectiveness of the mainland's monetary policy.

Judging from the specific practice of the mainland, the structural monetary policy tool is a tool for the central bank to guide the credit investment of financial institutions, and supports financial institutions to increase credit to specific fields and industries by providing re-lending or capital incentives, which is a useful supplement to the aggregate monetary policy and plays an important role in smoothing the monetary policy transmission mechanism.

Taking green finance as an example, in 2021, the People's Bank of China (PBoC) set up two tools to support carbon emission reduction support tools and special refinancing tools for clean and efficient use of coal to support the development of key areas of carbon emission reduction. Financial institutions issue carbon emission reduction loans at their own risk, and the re-loans provided by the central bank to financial institutions will be recovered when they expire. Financial institutions receiving financial support undertake to disclose information such as the balance, interest rate and carbon emission reduction effect of carbon emission reduction loans, and accept third-party verification and social supervision. Up to now, the carbon emission reduction support tool has guided financial institutions to issue more than 1.1 trillion yuan of carbon emission reduction loans, covering more than 6,000 market entities, driving annual carbon emission reduction of nearly 200 million tons. Nearly 300 billion yuan of special re-loans were issued to support the clean and efficient use of coal. As a result, as of the first half of 2024, the balance of green loans in local and foreign currencies in mainland China has exceeded 30 trillion yuan, a year-on-year increase of 28%, and the growth rate is 20 percentage points higher than that of various loans. Since its launch in 2016, the green bond market has issued more than 3.7 trillion yuan, with a stock size of 2 trillion yuan, maintaining its position as the world's largest green bond issuance market for two consecutive years. The two structural tools give full play to the function of monetary policy to directly reach green and low-carbon sectors and help reduce carbon emissions.