On November 16, the PBC released a Report on the Implementation of China's Monetary Policy in Q3 2019 (the "Report" for short below), which covered the economy, prices, policies, RMB exchange rate, central bank bills, and the next stage of monetary policy thought. 

1 Five policy thoughts since the Q3 

The report noted that since the Q3 2019, China's economy has been generally stable, structural adjustment has been solidly promoted, investment has stabilized amid a slowdown, consumption and employment have been generally stable, and the structural characteristics of rising prices have been obvious. Meanwhile, the situation at home and abroad is complex and severe, the challenges and difficulties are rising, and economic downward pressure continues to increase. 

In this context, the PBC adheres to the fundamental requirement of financial services for the real economy, implements a prudent monetary policy, and strengthens structural and counter-cyclic adjustments, combining reform and regulation, short-term and long-term, and internal and external equilibrium. It adopts reforms to unblock the monetary policy transmission, and promote the reduction of social comprehensive financing costs, so as to create a suitable monetary and financial environment for the realization of "Six Stability" Initiative and high-quality economic development. 

Firstly, adopting unlocking channels to deepen the financial supply-side structural reform, and improve the monetary policy transmission. 

Secondly, regulating gate to maintain a reasonable and sufficient liquidity, and guide the rational growth of the money supply and social financing scale. 

Thirdly, using precision drip irrigation to strengthen guidance in structural adjustment and support the development of private, small and micro enterprises. 

Fourthly, introducing accurate bomb disposal to promote the risk disposal of Baoshang Bank in a stable and orderly manner, so as to prevent and defuse financial risks. 

Fifthly, taking the initiative to strike a balance between internal and external equilibrium, and effectively deal with external shocks. 

On the whole, prudent monetary policy has achieved remarkable results, the transmission efficiency has been significantly improved, and the main macroeconomic indicators have been kept within a reasonable range. 

2 Guard against/prevent the divergence of inflation expectations 

Will the current "pig inflation" constrain monetary policy? The PBC gave a positive response in the report. 

Compared with the previous issues, the report has made a marked increase in the amount of attention paid to price, devoting a special column (Column 4, Comprehensive View of the CPI and PPI) to discuss price movements and policy responses. In the full text, there are six references to inflation expectations, making it clear that divergence of inflation expectations should be guarded against/prevented. 

The report suggested that due to the combined effects of the African swine fever epidemic and cyclical factors, the price of pork has risen rapidly, and the substitution effect of consumption has led to increases in the prices of other meat, including poultry and eggs, which has led to an increase in the prices of consumer goods. Overall, the supply shock caused by the swine fever epidemic still needs to be calmed for a certain period of time. In the short term, consumer prices are still facing upward pressure. It is necessary to continuously monitor dynamic changes and be alert to the divergence of inflation expectations. 

The PBC believes that, at present, China's economy is generally stable and overall supply and demand are in balance, thus, there is no sustained inflation or deflation. However, global economic downward pressure has increased, monetary policy space in major economy has been limited, and external uncertainties and destabilizing factors are still on the rise. China's long-term and short-term development, changes in internal and external factors bring more risks and challenges; the domestic economic downward pressure continues to increase; the endogenous growth momentum still needs to be further enhanced; and the food price index has increased significantly year-on-year. In the future, it is necessary to vigilant against divergence of inflation expectations. 

3 Exchange rate above "7" pushed by market forces 

On August 5, the RMB exchange rate presented above "7" pushed by market force, acting as an automatic stabilizer, the report said. The RMB exchange rate fluctuated in both directions on the basis of market supply and demand, and remained basically stable at a reasonable and balanced level. At the end of September, the CFETS RMB exchange rate index was 91.53, which was expected to level off. 

In addition, the PBC devoted a special column (Column 2, Establishing a Normal Mechanism for Issuing RMB Central Bank Bills in Hong Kong) to discuss the issue of RMB central bank bills in Hong Kong. 

The PBC has pointed out that it will continue to issue central bank bills in Hong Kong on a normal basis, and further enrich the short-term and high-grade RMB financial products in the Hong Kong market, so as to improve the development of the offshore RMB money market, and promote the internationalization of the RMB. 

4 Steadily and orderly promoting the risk disposal of Baoshang Bank 

The report said that the takeover and custody of the Baoshang Bank went smoothly, with stopping financial violations and curbing the spread of risk. It not only protected the legitimate rights and interests of clients to the maximum extent, but also broke the rigid payment in accordance with the law and regulations, as well as promoting the rational credit stratification in the financial market. 

The PBC has set up "four lines of defense" to guard against liquidity risk of small and medium-sized banks, stabilized market confidence in time through monetary policy, and played an important role in maintaining the smooth operation of financial markets such as money, bills and bonds. 

The PBC pointed out that efforts should be made to deepen the reform of small and medium-sized banks, improve the corporate governance structure and risk internal control system fitting the characteristics of these banks, and cope with the root causes of systems and mechanisms for the development of these banks. 

5 Promptly working out a plan to convert benchmark interest rates for existing loan rate 

On August 17, the PBC announced to improve the formation mechanism of the Loan Prime Rate (LPR), dredging the transmission channels of market-oriented interest rate, pushing banks to improve their operational behavior, breaking the implicit lower limit of the loan rate, and promoting the reduction of enterprise financing costs. 

The PBC noted that the formation mechanism of Loan Prime Rate (LPR) has been improved through reform. The effect of promoting the reduction of the real interest rate of enterprise loans through market-oriented reform was initially apparent, and the newly issued corporate loan rate in September dropped 0.36 percentage points from the 2018 high. 

The PBC has proposed that in the next stage, it will continue to do a good job of LPR quotation and application, guide and supervise rational pricing of financial institutions, and further break the implicit lower limit of loan rate, clearing up the transmission channels from market interest rate to loan rate, and promptly working out a plan to convert benchmark interest rates for existing loans. 

6 Policy thought of next stage: resolutely refraining from " extensive administration" 

In the next stage, the PBC will implement a prudent monetary policy closely around the three tasks of serving the real economy, preventing and controlling financial risks, and deepening financial reform. 

1. The Bank will continue to maintain a steady momentum, grasp the strength and pace of policies, and strengthen counter-cyclic adjustment and structural adjustment, properly cope with the short-term downward pressure on the economy, resolutely refrain from extensive administration, and keep the growth rate of broad money M2 and social financing scale in line with nominal GDP growth. 

2. Efforts will be made to guide expectations, prevent divergence of inflation expectations, maintain overall price stability, adhere to market-oriented reform methods to reduce the financing costs of the real economy, encourage banks to make more use of LPR, and guide financial institutions to increase support for the real economy, especially for private and small and micro enterprises. 

3. Work will be done to improve the systems and mechanisms for sustainable capital replenishment, and give strong support to small and medium-sized banks to replenish capital through multiple channels, and optimize their capital structure. 

4. Efforts will be made to harmonize domestic and foreign exchange policies, strike a balance between internal and external equilibrium, and maintain the basic stability of the RMB exchange rate at a reasonable equilibrium level. 

5. Strengthening risk monitoring, and adhering to the promotion of high-quality development in the prevention and resolution of risks, it will accurately and effectively address risks in key areas. 

6. A good job will be done to deepen financial supply-side structural reform, build a modern central bank system, and improve a modern financial system that is highly adaptable, competitive and inclusive in a bid to form a virtuous triangular cycle among the supply, the demand and the financial systems.  

Source | finance.sina.com.cn