Subtle change in new expressions about monetary policy
It was pointed out at an executive meeting of the State Council on July 23 that the prudent monetary policy should be moderately tight. The country should keep moderate social financing scale and reasonably ample liquidity, smooth the monetary and credit transmission mechanism, and implement various measures which have been launched.
It is found that there’s subtle change in the new monetary policy. What does it mean?
According to public information, there were some changes in expression about monetary policy and liquidity since this year.
Firstly, expression about liquidity was changed from “reasonably stable” to “reasonably amply” at the executive meeting of the State Council held on June 20.
Secondly, the expression of “moderately tight” was put forward on June 27.
Not only the expression about policy has been changed, the monetary policy also saw changes in actual operation and the market strongly felt affluent liquidity.
The latest change took place in the morning of July 23. Although it was not the key moment at the end of a quarter and the liquidity was not tight, the People’s Bank of China (PBC) injected 502 billion yuan into the market to supplement liquidity via 1-year medium-term lending facility (MLF) on that day.
The fixed-income research team from Citics Securities viewed that it has been repeatedly confirmed that monetary policy is loose. And this fact is confirmed again through the unexpected MLF conducted by the PBC this time.
In fact, these expressions are not raised for the first time.
It can be found in reports about execution of monetary policies years ago that moderate monetary policy was carried out during period of 1998 and 2007 and period of 2011 and 2016. The expression of “moderate and neutral” didn’t come out until the Central Economic Working Conference held at the end of 2016.
The last time that the expression “stable” and “moderately tight” monetary policy implementation report was the fourth quarter of 2015. At that time, the expression says “continue to implement a prudent, moderately tight monetary policy, which should be adjusted at proper time”.
The year 2015 saw frequent monetary policy operations. The benchmark interest rate for RMB deposits and loans was lowered five times. The interest rate of reverse repurchase operations for the open market was lowered nine times. The reserve requirement ratio was adjusted for five times, including four general RRR cuts and five targeted RRR cuts. Accumulatively, the RRR of financial institutions was generally lowered by 2.5 percentage points, and the accumulated additional funds were adjusted to reduce the deposit reserve ratio of financial institutions by 0.5 to 6.5 percentage points.
Of course, as the macroeconomic financial environment and market environment is different, the monetary policy operation is also changing. Although the current expression of monetary policy is similar to 2015, it does not mean monetary policy will be similar.
The State Council executive meeting requested that the macroeconomic policy be stable, adhere to the principle of no strong stimulus. Monetary policy should be adjusted according to the situation to respond to the external environmental uncertainty, and maintain the economic operation in a reasonable range.
However, professionals generally believe that the expression “stable”, “moderately tight” and “reasonably ample” are not simple literal changes. Behind them, monetary policy may show a marginal loosening trend.
Starrock Invest believes that the State Council executive meeting proposed to “maintain moderate social financing scale and reasonably ample liquidity”, which means that liquidity will continue to be loosening marginally. Under the framework that the credit risk of SMEs is expected to be released, the market is expected to bottom out.
Zhang Yiping, macro analyst at China Merchants Securities, said that there are two expressions in the State Council executive meeting worthy of attention. First is to maintain a moderate social financing scale. Second is to smooth the monetary and credit transmission mechanism. The former expression means that as the outstanding social financing continues to fall, there will be changes. The latter expression means that the main contradiction of monetary policy in the second half of the year is not that there are still several targeted RRR reductions, but how to improve the policy transmission mechanism.