The monetary policy committee of the People's Bank of China (PBOC) recently held its quarterly meeting for the fourth quarter of 2020. As the monetary policy-making body, the contents and decisions of its meeting determined the direction of monetary policy for the year ahead. According to a statement released after the meeting, the PBOC said that it will focus on formulating cross-cycle policies to support high-quality economic development. The PBOC will implement a prudent monetary policy that is flexible, precise, reasonable, and moderate, in addition to keeping it consistent, stable, and sustainable. It will also pay attention to the ideal timing, extent, and impact of policies, and maintain the necessary support for economic recovery. The PBOC will use a variety of monetary tools to ensure liquidity at a reasonable and ample level and keep the growth of money supply and social financing basically in line with nominal economic growth and maintain a stable macro leverage ratio, according to the statement. The meeting also put forward the overall policy is "to stick to a stable course while seeking improvement and not to make sharp turns."
As for the implementation of monetary policy this year, the meeting noted that monetary policy has undergone a "sharp turn" from easing in the first half of the year to "returning to normal" in the second half. From the beginning of the year to early May when the COVID-19 pandemic was basically under control, monetary policy was mainly loose in response to the impact of the pandemic. From May to September, with abundant market liquidity, monetary policy began to tighten marginally, and the market interest rate continued to rise. However, since September, the monetary policy has been focused on neutral "precise adjustment", market liquidity has been maintained, market interest rates have been steadily fluctuating, and the policy has become prudent and neutral. In December, short-term liquidity was injected into the market in view of the "year-end" funding requirements, causing market interest rates to fall significantly, but this was more of a short-term adjustment and not a trend change.
Apparently, the PBOC was satisfied with the effects of moderately loose monetary policy this year. It believes that "prudent monetary policy reflects forward-looking, precise and timeliness" and provides support and guarantee for economic recovery. At the same time, this year's policy is also structurally characterized, that is, through some policy tools and refinancing and rediscounting policies, credit resources have been tilted in favor of the real economy and small and medium-sized enterprises, thereby maintaining the vitality and stability of the real economy.
From this perspective, when the pandemic situation is basically stable in 2021 and the overall economy continues to recover, it is very unlikely that the PBOC will continue to increase monetary stimulus, and more importantly, it will consider the stable withdrawal of stimulus policies. In this context, the proposed "prudent monetary policy with no sharp turn" also has the consideration of economic stability. However, it should be pointed out that the proposed "no sharp turn" emphasizes more on the "stable monetary policy", it's not about not making changes.
The new policy's emphasis on "maintaining stable macro leverage ratio" means that the scale of social financing will not increase further in the coming year and certainly will not fall. The goal of this policy is to "keep the growth of money supply and social financing in line with nominal economic growth", this could mean that the turning point of the credit growth cycle is coming. This is also the reason why the PBOC put forward to "focus on formulating cross-cycle policies". However, it must be pointed out that the PBOC proposed to "properly handle the relationship between economic recovery and risk prevention, and keep the bottom line of no systemic financial risk", which means that the monetary policy will adapt to the changes of the overall economic situation, and will not contract due to the need of risk prevention.
Of course, in the current global environment, the Federal Reserve, the European Central Bank, and the Bank of Japan have all maintained and extended loosening policies in response to the impact of the pandemic. In the coming year, it will be difficult to see a "sharp turn" in the absence of an effective economic recovery. This means that China will still face the external environment of global monetary easing and it will be difficult to change the trend of monetary liquidity in the domestic market, either actively or passively.
But how can the goal of "stabilizing the economy" be achieved when the aggregate expansion is limited? This means that the PBOC would still step up its structural expansionary policy. In other words, the PBOC "will further leverage on the role of refinancing, rediscounting and directing monetary policy tools for the real economy, in addition to increasing financial support for technological innovation, small and micro enterprises, and green development. This is also coupled with its continuity in the policy of deferring principal and interest payments on loans to small and micro enterprises, as well as to credit loan support program. In this way, the PBOC will deepen supply-side structural reform of the financial sector." It is hoped to promote the expansion of new economic components and realize the purpose of adjusting the economic structure in increment through structural loosening and improving the efficiency of the use of funds.
Therefore, as ANBOUND pointed out earlier, there is little room for monetary policy adjustment and there is still a need to strike a "dynamic balance" between stabilizing the economy and adjusting the structure. This also means that the policy will be more difficult to grasp, and will have to be more forward-looking and precise. However, in the case that fiscal policy will has to be contracted, the role of monetary policy in supporting the economy will become relatively important, which is the main consideration for the PBOC to insist on a "prudent monetary policy".
Final analysis conclusion:
The PBOC adheres to a prudent monetary policy, which emphasizes "stability" in its connotation, indicating that the monetary policy will seek a new balance between stabilizing the economy, adjusting the structure, and preventing risks.
