According to the Report on the Implementation of the Monetary Policy in Q3 2019 released by the People's Bank of China (the PBC) on November 16, 

counter-cyclic adjustment and structural adjustment will be strengthened, the short-term downward pressure on the economy properly coped with, extensive management resolutely opposed, and the growth rate of broad money M2 and social financing scale kept in line with nominal GDP growth. 

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. 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. 

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. 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. 

1. The monetary policy should stay focused, take the initiative to make China one of a few countries that implement normal monetary policy among major economies, make adjustment and fine tune in time according to the changes of economic growth and price situation, regulate in a proper range, strengthen expectation guidance, and guard against the divergence of inflation expectations. 

2. Efforts should be made to continue to balance the relationship between total quantity and structure, consolidate and dredge the micro foundation of monetary policy transmission from either the supply side or the demand side, and cope with the pressure of local social credit crunch. 

3. As China's economic downward pressure continues to increase, the endogenous growth momentum needs to be further enhanced. Giventhe food price index has a large year-on-year increase, we need to be alert to the divergence of inflation expectations in the coming time. 

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. 

4. The PBC will continue to improve the normalization mechanism for the issuance of RMB central bank bills in Hong Kong, reasonably arrange the issuance scale, term and varieties according to the market demand, encourage other issuers to issue RMB bonds in the offshore market, and facilitate the sustainable and sound development of the offshore RMB market. 

5. According to the framework requirements of the Guiding Opinions on Improving the Regulation of Systemically Important Financial Institutions, the PBC is working with competent departments to formulate the Evaluation Measures for Systemically Important Banks in an effort to establish the evaluation index system of systemically important banks in China from the aspects of scale, relevance, substitutability and complexity, clarify the evaluation methods and processes, and issue the list at the proper time and put forward additional regulatory requirements. 

6. The take-over and custody of Baoshang Bank progressed well. By now, the large amount debt acquisition and transfer in the first stage has come to an end and the appraisal of the fixed assets and the circulating funds in the second stage has been completed basically. On such a basis, the market-oriented reform and reorganization in the third stage is on the way. The monetary policy better serves the real economy. The Report also pointed out that efforts should be made to play the role of monetary and credit policies in propelling economic restructuring and better serving the real economy. Specifically, the Report also stated that "we should strive to make good use of multiple monetary policy tools such as targeted cuts to required reserve ratios, re-lending and rediscount", "efforts should be made to develop new portfolios of monetary policy tools", "the precision functioning of structural monetary policy tools should be given to full play", "financial support for weak links and key areas should be intensified", "financial support for pro-employment policies should be strengthened" and "the real estate sector should not be employed as a short-term economic stimulus", Wang Yifeng also believes that in the future, as the counter-cyclic adjustment is strengthened, greater efforts should be made in structural adjustment to achieve accurate functioning of the real economy. 

Some insiders believe that in recent years, China has been adhering to a prudent monetary policy and the "normal monetary policy" position. These moves are to continuously deepen the reform of the financial system, properly prevent and defuse financial risks, and ultimately ensure that financial resources can more effectively serve the high-quality development of the real economy. 

In fact, the improved transmission quality of monetary policy has been reflected in data. By the end of September, M2 and the stock of social financing scale went up by 8.4% and 10.8% year on year respectively. The growth rate of M2 and social financing scale basically matched and were slightly higher than that of the nominal GDP in the first three quarters, reflecting strengthened counter-cyclic adjustment. In the first three quarters, RMB loans increased by RMB13.6 trillion, up 486.7 billion year on year. The increased fund was mainly invested in weak links such as private enterprises and small and micro enterprises. The comprehensive corporate financing cost remained stable with a slight decline. In September, the weighted average issuance rate of corporate bonds was 3.33%, 1.26% lower than the peak of the previous year. Amongst others, the weighted average issuance rate of private corporate bonds was 1.8% lower than the peak of the previous year. The corporate loan rate of new loans decreased by 0.36% compared with the peak of the previous year. 

The prudent monetary policy is reflected in China's economic fundamentals. Liu Aihua, spokeswoman of the National Bureau of Statistics, said that according to the main indicators from January to October, the overall situation of economic operation has not changed greatly and still remained stable. "As the counter-cyclic adjustment exerts its effect, it will help to progressively bring into play the medium and long-term opportunities and advantages and the potential impetus for future growth will gradually accumulate. We have full confidence that our economy will grow in a stable, sustainable and sound way in the future. 

At present, China's economy has no foundation of sustained inflation or deflation. 

At present, China's economy is generally stable and overall supply and demand are in balance, thus, there is no sustained inflation or deflation. It is anticipated that in the second half of 2020, the impact of tail raising factors on PPI will be less than that in 2019 and become more stable, that the impact of rising food prices on CPI will gradually ebb and the gap between them will come to be narrow. In the next stage, the prudent monetary policy will be kept moderately balanced, and adjusted and fine tuned in time based on the changes of economic growth and price situation. Further, the inflation expectations of economic entities will be stabilized and the overall price level maintained within a reasonable range. 

The real estate sector should not be employed as a short-term economic stimulus. 

The PBC reiterated in the Report on the Implementation of China's Monetary Policy in Q3 2019 that, in line with the basic principle of "implementing targeted policies for targeted city", the long-term management mechanism of real estate should be implemented and the real estate sector should not be employed as a short-term economic stimulus.  

The PBC said that since Q3, the real estate market has maintained a stable position on the whole, the growth rate of real estate loans has dropped steadily, the house prices have fallen, and the growth rate of investment in real estate development and new construction has declined steadily. Further, the number of cities with rising house prices has dropped. 

Efforts should be made to actively promote the application of LPR and break the implicit lower limit of loan rate. 

The PBC requires all banks to price new loans mainly by reference to LPR (Loan Prime Rate) as soon as possible, and resolutely break the implicit lower limit of loan rate set by some banks in the past, and incorporate the application of LPR into the Macro Prudential Assessment (MPA) and self-discipline mechanism management. 

As put by the PBC, phased achievements have been accomplished in the reform and improvement of the LPR formation mechanism. In September, 46.8% new loans were priced based on LPR, most of which were corporate loans. As the effect of LPR reform has gradually emerged, the transmission efficiency of market interest rate to loan rate has got improved, driving down the corporate loan rate. In September, the corporate loan rate of new loans dropped by 0.36% compared with the peak of 2018, showing the policy effect of cutting down the real interest rate by the means of market-oriented reform. 

Source | Securities in China, www.bjnews.com