The Central Economic Work Conference this year requires that economic work next year should prioritize stability while pursuing progress.
Finance provides the lifeblood for economic development. How will monetary policy focus on stability? What financial policies benefiting market entities will be rolled out next year? How to prevent and defuse financial risks? Governor Yi Gang of the People’s Bank of China (PBC) recently had an interview with Xinhua News Agency on the hot financial topics.
Stability in three areas enhance the capabilities to serve the real economy
Q: The Central Economic Work Conference called on all parties to actively launch policies conducive to economic stability, and implement supportive policies ahead of schedule. Based on this, how will monetary policy focus on stability? What are the priorities for intensifying cross-cycle adjustments of macro policies and making macro management more forward-looking and targeted?
A:The Central Economic Work Conference stressed that the economic work in 2022 should prioritize stability while pursuing progress. We should keep the sound monetary policy flexible and appropriate and keep liquidity reasonably adequate. The emphasis on “stability” in 2022 is based on the current domestic and international situations.
Domestically, China’s economy demonstrates strong resilience, and the fundamentals for long-term steady growth are unchanged. But it is facing short-term downward pressures from demand contraction, supply shocks and weakening expectations, and we must stabilize the macro economy. Globally, under the impact of COVID-19 pandemic, the external environment is becoming increasingly complicated, severe and uncertain, making it harder to maintain internal and external equilibriums, which requires us to tackle with external uncertainties by means of stable economic and policy environments.
This year, the PBC has focused on domestic conditions and prioritized stability, and carried out more forward-looking, effective, and targeted monetary policies to further enhance financial support for the real economy. In 2022, the PBC will earnestly implement the guiding principles of the Central Economic Work Conference, and further strengthen the capabilities of the financial sector in serving the real economy, in the following three respects regarding stability:
First, we will maintain the stable growth of aggregate money and credit. We will work to keep the growths of money supply and the aggregate financing to the real economy (AFRE) basically in line with the nominal GDP growth.
Second, we will steadily optimize the financial structure. Since the beginning of 2021, the inclusive loans to micro and small businesses (MSBs) have supported over 42 million MSBs. Next, the PBC will introduce targeted policies and guide the financial institutions to increase support to the real economy, especially to MSBs, technological innovation and green development, so as to bolster high-quality development.
Third, we will keep overall financing costs stable with a small decline. The average interest rate on corporate loans in 2021 has dropped to below five percent, reaching a record low. Going forward, the PBC will improve the market-oriented interest rate formation and transmission mechanism, leverage the progress achieved in the loan prime rates (LPR) reform, and keep overall financing costs for businesses stable with a small decline.
We should ensure renewal and transition of the two monetary policy tools providing direct support for the real economy
Q: The Central Economic Work Conference called for more financing support to the real economy and more financing to micro, small and medium enterprises (MSMEs) with wider coverage and lower costs. What specific arrangements does the PBC have in this regard?
Q: Facing the pandemic impacts rarely seen in history over the past year, the PBC resolutely implemented the arrangements of the CPC Central Committee and the State Council to ensure stability on six fronts and maintain security in six areas. We initiated two monetary policy tools that provide direct support for the real economy, one is to defer principal and interest repayments of inclusive loans to MSBs that are temporarily in difficulty, and the other is to boost unsecured inclusive loans for MSBs. These two tools directly address the demands of micro entities and they carry market-oriented designs, which is why they are sustainable and well recognized by the market.
In the next year, the PBC will take the renewal and transition of these two tools as its priority: first of all, regarding the support instrument for inclusive MSB loans, from 2022 to the end of June 2023, the PBC will fund the inclusive loans to MSBs and self-employed businesses issued by locally incorporated banks with one percent of the increase in the outstanding amount, so as to encourage more inclusive loans to be granted to MSBs. Second, the unsecured inclusive loans to MSBs will be included in the management of central bank lending for rural development and MSBs. The RMB400 billion special quota of central bank lending for inclusive MSB loans could be used on a rolling basis, and the quota may be further increased when necessary.
The tools providing direct support for the real economy will continue to be implemented with a market-oriented principle, mainly reflected in the following three respects: first, banks and businesses will make their decisions independently, which will enhance the market-oriented basis. Second, the tools will serve as positive incentives and guidance, motivating financial institutions to increase the volume, expand the coverage, and lower the costs of financing for MSMEs. Third, the PBC will follow the principle of soundness. While stepping up supports for MSMEs, the PBC encourages the sound operation of the businesses to prevent risks.
Special tools supporting peaking carbon emissions and achieving carbon neutrality will be put in place by the end of this year
Q: In November, the PBC launched the Carbon Emission Reduction Facility and special central bank lending for the clean and efficient use of coals. Could you please elaborate on the implementation of these two tools and how they support peaking carbon emissions and achieving carbon neutrality?
A: Stepping up financial support for peaking carbon emissions and achieving carbon neutrality is one of the PBC’s main tasks. In November, the PBC launched two special tools. One is the carbon emission reduction facility (CERF), targeted at three key areas, namely, clean energy, energy conservation and environmental protection, as well as carbon reduction technology. The other is the special central bank lending for the clean and efficient use of coals, which supports seven areas including clean production of coal, and application of clean combustion technologies. It is expected to safeguard the security of energy supply and facilitate carbon emission reduction in a scientific and orderly way.
With regard to the implementation of the two tools, financial institutions make their own decisions independently and bear the potential risks themselves, while the PBC offers low-cost funds for certain proportions of eligible loans. The PBC requires the financial institutions to disclose information on the issuance of loans for carbon reduction and the reduced emissions promoted by the loans, which is to be verified by professional third-party agencies and under public scrutiny.
The first batch of funds is expected to be granted to financial institutions by the end of this year. While launching these two policy tools, we should give more play to the role of the market, encourage more social funds to invest in the green and low-carbon sectors, and contribute to the goal of peaking carbon emissions and achieving carbon neutrality in a scientific and orderly manner.
Financial risks in China have moderated and remained under control on the whole
Q: How should we understand and work to prevent and defuse major risks? Will recent capital turnover problems in certain real estate enterprises affect the overall stable and sound development of China’s real estate sector?
A: Since 2018, the PBC has, in line with the overall arrangements of the CPC Central Committee, worked with relevant authorities and local governments to prevent and defuse major financial risks under the coordination and guidance of the Financial Stability and Development Committee (FSDC) under the State Council, and made some progress. At present, China’s financial system is sound, with financial risks generally moderated and controllable on the whole.
First and foremost, the continuous growth of the macro leverage ratio has been effectively curbed. The macro leverage ratio witnessed a transitory increase in 2020 due to pandemic shocks and then returned to the track of basic stability from the beginning of this year.
Second, the PBC has resolved multiple outstanding risks in an orderly manner, among which shadow banks, irregularities in offering financial services, and illegal fundraising have been curbed. The strengthened financial regulation and anti-monopoly efforts have yielded substantive results.
Third, the PBC has reinforced building the system for preventing and defusing financial risks. By improving a number of institutional arrangements, including the macro prudential policy framework, regulation on financial infrastructure and comprehensive statistics for the financial sector, we have remarkably enhanced the efficiency and resilience of financial markets.
After some real estate enterprises exposed their risks due to poor management and blind expansion of businesses, relevant authorities and local governments have taken active measures to defuse risks in a prudent and orderly way, so as to satisfy the normal financing demands of residents and real estate enterprises. The market expectations are gradually picking up. The structural adjustment in the real estate market is conducive to forming a new development paradigm and virtuous cycle of the sector and achieving its sound development.
In general, we should take a market-oriented and law-based principle to address risk events in the market economy, ensure the accountability of the shareholders and local authorities, and properly defuse all types of risks to safeguard the fundamental rights and interests of the people.
