Transmission of Money and Credit under Cross-Cyclical Adjustment
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
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
so as to achieve the goal of "cross-cyclical adjustment" of stable growth and
Contact ANBOUND Malaysia Office at : Suite 25.5, Level 25, Menara AIA Sentral, 30 Jalan Sultan Ismail, 50250 Kuala Lumpur
TEL : +60 3-21413678 Email : firstname.lastname@example.org ; email@example.com