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Tuesday, June 29, 2021
Stability and Possible Changes in China's Monetary Policy in the Second Half of 2021
ANBOUND

The Monetary Policy Committee of the People's Bank of China (PBoC) held a meeting recently to summarize the economic situation and policies in the first half of the year, and to clarify the monetary policy stance for the second half of the year. In a statement released after the meeting, the PBoC still stressed the need to implement monetary policy flexibly and precisely, so as to strike a balance between economic recovery and risk prevention, keep the economy running within an appropriate range, and ensure that it reaches a higher level of equilibrium during the course of the recovery. The statement indicates the overall monetary policy will maintain a stable policy stance, with the main goal as stabilizing growth and guarding against risks. However, researchers at ANBOUND noted that monetary policy in the second half of the year was still somewhat adjusted, with a greater emphasis on structural reform and protection against external influences.

Regarding the economic situation and the implementation of monetary policies in the first half of the year, the meeting mentioned that "the overall national economy has maintained a steady recovery trend", "China's current economic performance is stable and improving", and "prudent monetary policies have maintained continuity, stability, and sustainability". This indicates that the overall economic recovery is still relatively ideal, realizing the phased task of monetary policy for economic recovery since last year. At the same time, PBoC has completed the "normalization" of the monetary policy from the loose policy.

For the economic trend in the second half of the year, the PBoC believes that "the domestic and international environment remains complex and severe. It is therefore necessary to strengthen the study and analysis of the domestic and international economic situation, strengthen international macroeconomic policy coordination and guard against external shocks". ANBOUND noticed this means that the trend ahead will be more challenging after the economy has effectively recovered from the pandemic. On the one hand, after experiencing the impact of the pandemic, China's economic growth has rebounded sharply, but it still faces with the gap between slow recovery of demand and fast production, with a tendency to revert to the existing long-term growth path. On the other hand, the international economic situation has undergone great changes in the post-pandemic period. The shift of global monetary policy, the long-term rise of inflation, and the adjustment of the global industrial chain have all brought new challenges to the domestic economy. This means that in the second half of the year, there will be considerable pressure to stabilize growth and guard against risks. From the statement released after the monetary policy meeting, the PBoC still adheres to a "stable" monetary policy stance in the second half of the year.

However, the monetary policy meetings and the recent changes in money supply indicate that the focus of the stable monetary policy is changing, which deserves the market's attention. The monetary policy meeting mentioned improving the formation and transmission mechanism of market-based interest rates, adjusting the determination method of the self-discipline ceiling of deposit interest rates, the potential of loan market quotation rate reform, and pushing the real lending rate further down. At the same time, the PBoC meeting also stated that it will continue to implement the deferring of the loan repayment for small and micro enterprises and the credit loan support program through measures such as relending, rediscounting, and other monetary policy tools. This signifies in the second half of the year, the PBoC will further strengthen the reform of the monetary transmission mechanism and promote the structural reform of the financial and monetary systems. Its purpose remains to further release the space for reform policies and reduce financing costs for market players. This also means that after the adjustment of deposit rates, bank lending rates will probably be reduced slightly in the future.

As far as domestic RMB liquidity is concerned, although the PBoC will continue to adhere to a stable and neutral policy stance, we have noticed some signs of adjustment. Since June 24, the PBoC has expanded the scale of its seven-day reverse repo to RMB 30 billion a day, up from RMB 10 billion a day for nearly four months. The PBoC's open market operation sent a signal to the market, reflecting its determination to maintain liquidity in a "flexible and precise" manner. Combined with the market-oriented interest rate reform promoted by the PBoC, the monetary policy in the second half of the year will still be precisely adjusted as expected by ANBOUND.

In addition, the PBoC believes that it is still necessary to maintain the stability of the RMB exchange rate to cope with changes in the external monetary and financial environment. The PBoC's monetary meeting proposed to deepen the market-oriented reform of the exchange rate, enhance the flexibility of the RMB exchange rate, guide enterprises, and financial institutions to adhere to the concept of "risk-neutral", strengthen expectations management, promote internal and external balance, and maintain the basic stability of the RMB exchange rate at a reasonable and balanced level. This means that the PBoC is increasingly concerned about the impact of changes in the international situation on the Chinese economy, particularly a rise in global inflation, which will pose a host of new risks for Chinese enterprises accustomed to a long period of low-interest rates and low inflation. The fluctuation of the RMB exchange rate will have an impact on China’s domestic economy. Maintaining two-way fluctuations of the RMB exchange rate and avoiding one-way expectations is the basis of the PBoC's exchange rate policy in the second half of the year. At the same time, there is little room for the PBoC to adjust its monetary policy under the inflationary pressure both within China and from other countries.

Final analysis conclusion:

After normalization, China's monetary policy in the second half of the year will adhere to the stable monetary policy stance and release some space through structural reform and appropriate adjustment of liquidity, so as to achieve the goal of stable growth and risk prevention.

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