Social integration, M2 anchoring target or optimizing money and credit focus on structural strength.
Source: 21st century business herald.
In 2024, the National People’s Congress will be held soon, and the long-awaited economic expectations and policies will be announced. According to the usual practice, the government work report submitted to the National People’s Congress for deliberation will set the tone and elaborate this year’s monetary policy.
The market expects that this year’s monetary policy will remain stable, and it is expected to continue the "flexible, moderate, accurate and effective" tone, and support key areas such as "five major articles" through structural monetary policy tools and stock loans. It is worth noting that social integration and M2 anchor the target or optimization, instead of anchoring the nominal GDP growth rate, they are adjusted to "match the expected target of economic growth and price level".
Social integration, M2 growth target or optimization
Generally speaking, M2 and the growth rate of social integration, GDP growth rate and deficit ratio are all written as important quantitative indicators in the government work report. According to the reporter, in 2009, M2 began to set quantitative numerical targets, in 2011, social welfare began to write government work reports, and in 2016, quantitative targets were set.
In 2018, the government work report adjusted the monetary policy to "keep the M2 of broad money and the scale of credit and social financing grow reasonably", and then adjusted it to "the growth rate of M2 and social financing basically matches the nominal economic growth rate" in the following years. In ranking, M2 comes first, while social integration comes last.
According to the interpretation of the central bank, in the high-speed growth stage in the past, the potential growth rate of China’s economy was relatively high, and the actual growth rate fluctuated around the potential growth rate. Therefore, it is feasible to set a numerical target of M2. However, as China turns to a high-quality development stage, the potential growth rate has a downward trend. If we continue to set the digital target of M2 according to the actual value in the past, it may lead to the deviation between money and credit and economic operation, forming an excessively loose situation, which is not conducive to stabilizing the macro leverage ratio.
The data shows that from 2016 to 2019, the average growth rates of social integration and M2 were 11.3% and 9.1%, respectively. The former was 1.9 percentage points higher than the nominal economic growth rate, while the latter was 0.3 percentage points lower than the nominal economic growth rate. The growth rates of social integration and M2 basically matched the nominal GDP growth rate. From 2020 to 2022, the average growth rate of social integration and M2 was 11.1% and 10.3%, which were 4 and 3.2 percentage points higher than the nominal economic growth rate respectively. By the end of 2023, the growth rates of social integration and M2 were 9.5% and 9.7%, which were 5.3 and 5.5 percentage points higher than the nominal economic growth rate respectively, mainly because of low prices, and the nominal economic growth rate was rarely lower than the actual growth rate. In this context, if we continue to emphasize that "the growth rate of M2 and social financing scale basically matches the nominal economic growth rate", then the growth rate of social financing and M2 needs to be lowered.
Last year, the Central Economic Work Conference proposed that the scale of social financing and money supply should match the expected targets of economic growth and price level, and there have been major changes from the previous fixed tone. This new tone means that monetary policy should support both the price recovery and the return of economic growth rate to potential growth rate, especially the price recovery.
The relevant person in charge of the Central Finance Office said that this expression has two new ideas. First, the scale index of social financing is ranked ahead of the money supply, because this index is more closely related to economic growth; The second is to change the former "nominal economic growth rate" into "expected target of economic growth and price level", which can better coordinate the target requirements of economic growth and price level, and emphasize that price level is an important regulatory goal of monetary policy.
After the adjustment of the Central Economic Work Conference, the market expects that the growth targets of social finance and M2 in this year’s government work report will be adjusted to "match the expected targets of economic growth and price level". Under the above requirements, the growth rate of social integration and M2 still needs to maintain a relatively high level.
According to the calculation of research institutions, the potential economic growth rate of China’s economy is about 5.5% during the Tenth Five-Year Plan period. According to a working paper published by the People’s Bank of China in 2021, the growth rate of China’s potential output was between 5% and 5.7% during the Tenth Five-Year Plan period, and the overall growth rate continued to be medium and high. In recent government work reports, the expected target of price level is mainly CPI, which is around 3% in recent years. According to the new anchoring method, the growth rate of social integration and M2 should be maintained at 8.5% or even slightly higher this year.
According to the data of the central bank, the scale and M2 of social financing at the end of January were 9.5% and 8.7% respectively, which matched the expected targets of economic growth and price level, but still significantly higher than the nominal economic growth rate. People close to the central bank also said that since the epidemic, monetary policy has intensified its countercyclical adjustment, financial data is generally ahead of economic data, and the growth rate of M2 reached a high of nearly 13% in February last year, which was significantly higher than the nominal GDP growth rate. As the economy continues to recover, the growth rate of M2 will decrease steadily, and the gap between economic and financial growth will gradually converge.
Monetary policy is flexible, moderate, accurate and effective.
China’s monetary policy has five main categories: loose, moderately loose, steady, moderately tight and tight. In 2009, due to the impact of the global financial crisis, a moderately loose monetary policy was implemented that year. Since 2010, China has been implementing a prudent monetary policy.
The government work report in 2023 proposed that a prudent monetary policy should be precise and powerful. Keep the growth rate of broad money supply and social financing scale basically matching the growth rate of nominal economy and support the development of real economy. Keep the RMB exchange rate basically stable at a reasonable and balanced level.
From the practical point of view, the Bank of China cut interest rates by 10BP and 10~15BP in June and August last year, respectively. At the end of 2023, the one-year MLF and seven-day reverse repo rates were 2.5% and 1.8%, respectively, which were 35BP and 20BP lower than those at the end of 2022. In terms of deposit reserve ratio, the central bank lowered the RRR twice in March and September last year. At the end of 2023, the weighted average deposit reserve ratio of financial institutions was 7.4%.
Based on the recent high-level meetings held by the central government, the market expects that the tone of monetary policy in this year’s government work report will remain stable, but it emphasizes flexibility, moderation, accuracy and effectiveness. The Central Economic Work Conference held at the end of last year proposed that a prudent monetary policy should be flexible, moderate, accurate and effective, and maintain a reasonable and sufficient liquidity.
Yi Jiao, chief economist of macro research of Huatai Securities, said that monetary policy may continue the requirements of "flexibility, moderation, accuracy and effectiveness". In the medium and long term, there is room for both short-term and long-term interest rates to fall, but the pace of interest rate reduction may refer to macroeconomic and asset price trends. With the further clearing of the real estate cycle, and the overseas interest rate reduction cycle will start, it is not ruled out that there is still room for downward adjustment of long-term and short-term interest rates this year.
Xie Yunliang, macro chief analyst of Cinda Securities, said that China’s current inflation level is low, and low inflation leads to high real interest rates, so there is room for monetary policy to relax. The tone of monetary policy is expected to continue to be "flexible, moderate, accurate and effective" and attach importance to the efficiency of supporting the real economy.
From the past, flexibility and moderation mainly refers to the flexible adjustment of monetary policy according to the economic and financial situation and the maintenance of reasonable and sufficient liquidity. On February 5 this year, the central bank lowered the deposit reserve ratio of financial institutions by 0.5 percentage points, releasing long-term liquidity of 1 trillion. This RRR cut will help the macro-economy to further stabilize and rebound, ease the liquidity tension during the Spring Festival, and help stabilize the capital market.
Accurate and effective, mainly refers to financial support for key areas, and needs to have an effect. After 2020, a number of structural tools have been created one after another, including re-lending for scientific and technological innovation, re-lending for transportation and logistics, special re-lending for supporting clean and efficient use of coal, re-lending for inclusive pension, re-lending for technological innovation and so on. According to central bank data, there were 17 structural monetary policy tools by the end of 2023.
It is worth noting that the central bank disclosed that in December last year, the amount of supplementary mortgage loan (PSL) was 500 billion yuan, which provided medium-and long-term low-cost financial support for policy development banks to issue loans for "three major projects". In December last year, PSL increased by 350 billion yuan. Together with the new scale in January, the new scale of PSL in February reached 500 billion yuan. Under the requirement of "accuracy and effectiveness", many of the above-mentioned structural monetary policy tools may continue to be used or the quota may be increased this year, and even the possibility that the central bank will continue to create new tools is not ruled out.
"Structural tools are quantitative tools with the function of credit structure adjustment. They are positioned as a useful supplement to aggregate tools. When creating, continuing or withdrawing, we should not only consider the more prominent structural contradictions in economic operation, but also consider the willingness and ability of financial institutions to improve financial services in specific fields." Lu Lei, deputy governor of the central bank, said at the 2023-2024 China Economic Annual Conference held at the China Center for International Economic Exchanges last December.
Lu Lei also said that we take focusing on key points, being reasonable and moderate, making progress and retreating as structural tools. As a result, we should effectively cover important and weak areas in the national strategy and national economic development, which not only encourages financial institutions to expand credit supply in related areas, but also promotes the transformation and upgrading of the economic structure in the medium and long term.
Optimize the credit structure
The means to achieve accurate delivery of monetary finance include not only structural monetary policy tools, but also the revitalization of existing loans to increase financial support for key areas such as five major articles. The central financial work conference held at the end of October last year pointed out that the inefficient financial resources should be revitalized to improve the efficiency of capital use. Do five major articles on technology and finance, Green Finance, inclusive finance, Pension Finance and Digital Finance.
The Central Bank’s Monetary Policy Implementation Report for the Fourth Quarter of 2023 explains that not only incremental credit can support the real economy, but also revitalizing inefficient stock loans will contribute to economic growth. At present, the stock of credit funds is much larger than the annual increment, and the enterprise assets and derived monetary funds formed by stock loans continue to play a role in the economic cycle. Revitalizing the inefficient financial resources and improving the efficiency of the use of funds will not be reflected in the increase in loans, but it will also inject new impetus into the high-quality economic development.
"The stock of money and credit in China is already very large, and the circulation of stock funds also plays a role in economic growth. If the idle and inefficient stock funds are brought into full play, even if new loans are added and the money growth rate is slower, it can strongly support the real economy." The aforementioned people close to the central bank said.
According to the statement of the central bank, revitalizing existing loans requires an increase or decrease in the credit structure, in which the proportion of real estate loans and financing platform loans will decline, while loans for scientific and technological innovation, manufacturing, green development and universal benefits will tend to increase. Pan Gongsheng, governor of the central bank, said at the press conference of the State Council Office on January 24th that the People’s Bank of China will set up a credit market department to focus on five major articles.
Lu Lei said that the financial sector is focusing on five major articles, namely, technology and finance, green finance, inclusive finance, pension finance and digital finance, and the credit of real estate and local financing platforms that had been put in before may decline. At the same time, the increment and proportion of loans in key areas such as scientific and technological innovation, manufacturing, green development, and universal benefits are all rising significantly. At the same time, the proportion of direct financing will also increase in the future, which will have a benign substitution effect on loans, and the quality and efficiency of credit services to the real economy are bound to be significantly improved.
Yi Jiao said that considering that monetary policy is based on stability and "structural adjustment", the central bank may further increase the support of structural credit policies for investment, promote the flow of funds to entities and provide greater preferential interest rate support for key support areas (such as the five major articles emphasized by the Central Financial Work Conference).
Xie Yunliang believes that the "five major articles" may become an important direction of monetary policy. It is expected that more structural monetary policy tools will be introduced in the future to improve financial support for key areas and improve financing efficiency and quality.