On September 25, the Monetary Policy Committee of the PBC held its 86th regular meeting in Beijing in the Q3 2019. The meeting pointed out that we should make efforts to step up counter-cyclic adjustment, work to smooth monetary policy transmission with vigor, and improve the Loan Prime Rate mechanism with various monetary policy tools being adopted flexibly. At the meeting, seven messages were conveyed: 

1. Make sure that financial risks are controllable holistically 

2. Enhance our sense of urgency, maintain our strategic determination, and run our own affairs conscientiously 

3. Maintain the overall price stability 

4. Work to smooth monetary policy transmission with vigor and support small and medium-sized private enterprises 

5. Adopt a variety of monetary policy tools flexibly to maintain reasonable and sufficient liquidity 

6. Improve the Loan Prime Rate mechanism and expand its practical application 

7. Implement the "Six Stability" Initiative (the abbreviation of ensuring stable employment, stable finance, stable foreign trade, stable foreign investment, stable investment and stable anticipation) across the board 

Focus I: run our own affairs well conscientiously 

According to the meeting, it is necessary to continue paying close attention to the profound changes in the international and domestic economic and financial terrain. That means we should enhance our sense of urgency while maintaining strategic determination to conscientiously run our own affairs well. 

Yi Gang, governor of the PBC, said earlier that China is a large economy. Its monetary policy is designed mainly to serve the domestic economy based on China's realities. We shall carry out anticipatory adjustments and fine-tuning in accordance with the domestic economic situation and price trends. China's main economic indicators are still within a reasonable range and prices are in a moderate range. Some structural problems encountered in the process of transformation and upgrading are mainly resolved through supply-side structural reforms. Based on a comprehensive analysis of the domestic situation and the international background, China should maintain a steady momentum and a prudent direction in its monetary policies. 

Yi Gang emphasized that we should cherish the normal monetary policy space in the whole process of monetary policy operation, where we can maintain the normal monetary policies as long as possible. This is beneficial to the sustainable development of the entire economy and the well-being of the people. 

Sheng Songcheng, former director of the Financial Survey and Statistics Department of the PBC, pointed out in an article a few days ago that China is in the course of economic transformation and structural readjustment, where we should take steps to coordinate the monetary policies to boost high-quality economic development in addition to taking into account the counter-cyclic adjustment. 

Focus II: improve the Loan Prime Rate (LPR) mechanism and expand its practical application 

The meeting mentioned that we should deepen the market-oriented reform of interest rates, improve the Loan Prime Rate mechanism and expand its practical application. We should also maintain a basically stable RMB exchange rate while ensuring its reasonability and equilibrium, and promote sustainable and healthy economic development. 

Sheng Songcheng stressed that, in fact, the reform of LPR mechanism is smoothing the monetary policy transmission, and guiding the actual loan rate downwards through the market-oriented reform. At the meeting of the Financial Stability and Development Commission under the State Council convened on August 31, it was pointed out that counter-cyclic adjustment of macroeconomic policies should be intensified, and efforts should be made to smooth monetary policy transmission. 

How to develop LPR next? 

Wang Jianhui, analyst of Capital Securities, said that it is expected that the one-year LPR quotation will continuously be tuned slowly in the future, mainly through: reducing the cost of bank funds by lowering the deposit reserve ratio, which will consequently decrease the positive base point; directly reducing the MLF interest rate. 

In terms of the reduction of deposit reserve ratio, the targeted reduction announced on September 6 was implemented respectively on October 15 and November 15. This means that the next reduction of deposit reserve ratio will be put into effect after November 15, maybe in December at the earliest or early next year 

During this period, it is expected that the one-year LPR quotation may be reduced by 5 base points on October 20 and November 20, respectively. 

Focus III: implement the "Six Stability" Initiative (the abbreviation of ensuring stable employment, stable finance, stable foreign trade, stable foreign investment, stable investment and stable anticipation) across the board 

At the meeting, it was pointed out that we should follow the general principle of pursuing progress while ensuring stability, exert ourselves to motivate micro-economic entities, and fully implement the "Six Stability" Initiative. 

Liu Feng, chief economist of China Galaxy Securities Co., Ltd., said that the central government aims at reversing the over-tightening effect of the previous policy superposed co-development through putting an emphasis on the "Six Stability" Initiative and intensifying counter-cyclic adjustment of macro-policy since the beginning of this year, especially after the middle of this year. 

In fact, the "Six Stability" Initiative has become a prominent focus of this year's economic work. Fiscal policy space should be leveraged against long-term structural problems as an important means to resist public risks in the process of national governance. Therefore, since the middle of the year, the main task of monetary policies has become even more important for counter-cyclic adjustment. 

Focus IV: intensify counter-cyclic adjustment 

It was pointed out that we should innovate and improve macro-control, intensify counter-cyclic adjustment, and make macro-policies more coordinated to form a resultant force. 

According to the report of Golden Credit Rating International Co., Ltd., the objective of intensifying the counter-cyclic adjustment of monetary policy has been clearly set for the future. The "rate cut" is hopeful after the reduction of deposit reserve ratio, the targeted supporting monetary policies for manufacturing, private and small and micro enterprises will continue to develop, and the growth rate of M2, social finance and credit is expected to rebound later. 

It should be noted that the job market is basically stable, requiring no "strong stimulus". Therefore, both the current reduction of deposit reserve ratio and the future "rate cut" fall into the category of prudent monetary policies. 

Focus V: maintain the overall price stability 

As mentioned at the meeting, the prudent monetary policies should be tightened moderately, and we should ensure the aggregate monetary supply is well controlled and refrain from using a deluge of stimulus policies, ensure that the growth rate of broad money M2 and the social financing scale is in line with the nominal growth rate of GDP, and take steps to keep a stable price holistically. 

In August, CPI slightly outstripped the anticipation in year-on-year growth because of higher food prices, but the current inflation is generally under control. In addition, the consecutive negative growth of PPI also implies an increase in real interest rate of enterprises, which forebodes the possible rising demand of counter-cyclic adjustment of monetary policies. 

Focus VI: work to smooth monetary policy transmission with vigor and support small and medium-sized private enterprises 

It was indicated that we should make great efforts to smooth the monetary policy transmission, remain committed to the market-oriented reform method to promote a significant reduction in the real interest rate, encourage financial institutions to intensify their support to the real economy, especially small and micro enterprises and private enterprises, and endeavor to ensure that financial support for private enterprises is commensurate with the contribution of private enterprises to economic and social development. 

Focus VII: maintain reasonable and adequate liquidity 

At the meeting, the comprehensive use of a variety of monetary policy tools in Q2 is replaced by the flexible use. The meeting made it clear that we shall flexibly adopt a variety of monetary policy tools to maintain reasonable and adequate liquidity. 

Previously, the PBC proposed at a video conference on the work of the second half of 2019 held in early August that we shall flexibly adopt a variety of monetary policy tools to timely and appropriately conduct counter-cyclic adjustment, maintain reasonable and adequate liquidity, and guide the broad money supply and social financing scale growth to match GDP nominal growth. 

Focus VIII: make sure that financial risks are controllable holistically 

As the meeting indicated, the prudent monetary policies reflect the requirements of counter-cyclic adjustment and preliminarily curbs the high-speed growth of the macro-leverage ratio, which means that financial risks are generally controllable. We are witnessing the gradually improved quality and efficiency of the real economy of financial services. 

Source | China Securities Journal