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Thursday, August 26, 2021
Transmission of Money and Credit under Cross-Cyclical Adjustment
ANBOUND

With the gradual slowdown of China's economic growth, the market is concerned about the direction of the People's Bank of China (PBoC)'s monetary policy. At present, the market has different understandings of the PBoC's "cross-cyclical adjustment of macro policies", "more forward-looking and effective policies" and a series of policy tones, and there are also debates on policy expectations. Among them, the most controversial topic is "credit easing". Some people suggest that the PBoC's monetary policy is shifting from "monetary easing" to "credit easing", which will cause changes in the financial market and the real economy.

After the central government and the PBoC repeatedly elaborated on monetary policy and communicated the market, the market has reached a consensus on the shift of monetary policy from stimulus in to normalization. Although the PBoC unexpectedly cut the reserve requirement ratio (RRR) in July, hence the market perceived that the policy would be eased again, but with the changes in liquidity, MLF and LPR later, the PBoC still adhere to the basic policy tone of "monetary stability" and the relevant RRR cuts were only adjusted on a prudent basis. In the current market environment, even if further RRR cuts remain highly likely, signal for easing is actually getting weaker. As for the market, there is little disagreement in the understanding and awareness of monetary easing under "cross-cyclical adjustment".

Figure: Changes of China's economic growth, credit growth, and money growth

At present, the main disagreement is actually whether there will be "credit easing" in the case of "monetary stability"? From the adjustment of deposit interest rate reduction mechanism promoted by the PBoC and the operation of replacing MLF with RRR cuts, the PBoC is indeed promoting the adjustment and optimization of financial transmission mechanism so as to reduce the financing cost of the real economy. The PBoC's monetary policy implementation report also emphasized its focus on the policy effect on the real economy's credit cost. It is the structural policy measures taken by the PBoC that have led some market participants to believe that the goal of monetary policy is shifting to "credit easing" in order to support the real economy while maintaining monetary stability. In addition, as the pace of local bond issuance slows down in the first half of the year, the peak of local bond issuance shifts to the third and fourth quarters. Infrastructure investment financed by special bonds may also support credit expansion in the second half of the year.

In particular, many market participants who hold "credit easing" expectations are based on the opinions of Sun Guofeng, Director-General of the Monetary Policy Department of the PBoC, that "the growth rate of broad money supply (M2) and social financing scale should basically match the nominal economic growth rate". As a result, market participants believe that with M2 growth and social financing growth both falling in the first half of the year, achieving the intermediary target will require higher social financing growth in subsequent months.

Of course, in the view of those who hold the expectations of "tight credit", under the condition of "monetary stability", the PBoC will face many difficulties in promoting "credit easing". The main difficulties are the pressure of "three red lines" on real estate investment and the continuous tightening of the real estate market regulation policy; under the pressure of "risk prevention", the expansion of local hidden debt is restrained; the impact of tighter policies on Internet companies and public services under the "common prosperity" policy continues to hit the direct financing market. These structural tightening policies do not, in fact, achieve overall credit easing. In other words, there is no overall policy orientation to promote "credit easing" in macro policies.

From the perspective of the transmission of money and credit, researchers at ANBOUND believe that the realization of credit easing depends not only on monetary policy, but also on the environment of financial institutions and the real economy. Whether credit is loose or not does not completely represent the orientation of the PBoC's monetary policy. The structural policies adopted by the PBoC actually hope to improve the financial environment and the real economic environment and realize the effective utilization of financial resources, which cannot be simply understood as the promotion of overall credit. Under the goal of stable growth and risk prevention, the structural monetary policy of "rural revitalization" and encouraging the development of small and medium-sized enterprises may bring about structural changes in credit, but on the whole, credit has not yet changed.

Therefore, the debate on credit "easing and tightening" still needs to be considered in a longer-term framework based on the policy of "cross-cyclical adjustment". The purpose of "cross-cyclical adjustment" is to reduce the fluctuation of the business cycle. From this point of view, the monetary policy of the PBoC is actually to stabilize credit on the basis of "monetary stability", so as to reduce economic fluctuations and cultivate endogenous economic momentum in a stable environment.

Final analysis conclusion:

The logic of PBoC's monetary policy has not changed. In fact, it is still "stabilizing credit" under the condition of "monetary stability", so as to achieve the goal of "cross-cyclical adjustment" of stable growth and risk prevention.

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