On February 24, the Central Bank released the "Report on the Implementation of China's Monetary Policy in the Fourth Quarter of 2022" (hereinafter referred to as the "Report"), and set up four columns: "The Balance Profit of the Central Bank to Support Steady Growth", "Adhere to the Implementation of Steady Monetary Policy to Stabilize the Macroeconomic Market", "Strengthen the Financial Stability Guarantee System to Hold the Bottom Line of Systemic Risk", and "China's Consumer Consumption is expected to recover steadily".

Core ideas

With regard to the domestic economy, the central bank expressed more positively than the previous quarter, and clearly pointed out that "China's economic operation is expected to pick up as a whole, and the economic cycle will be smoother". Regarding inflation, the central bank's overall statement was more moderate than that of the previous quarter. The tone of monetary policy has not changed, and it still continues the requirements of the Central Economic Working Conference for "precision and strength".

| Signal 1: There is no obvious change in the central bank's statement about the global economy

He believed that "inflation is at a high level, the process of interest rate increase has not yet peaked, and the downward pressure on global growth is increasing". With regard to the domestic economy, the central bank expressed more positively than the previous quarter, clearly pointed out that "China's economic operation is expected to pick up overall, and the economic cycle will be smoother", but also stressed that "the foundation of domestic economic recovery is not yet solid", and specifically listed areas that are not clear in the short term, such as the transformation of household savings, real estate, local finance and so on.

We understand that "overall recovery" represents the overall goal set by the Central Economic Work Conference this year; At the beginning of the year, the rapid recovery of residents' living radius and the high opening of consumption and service industry data created favorable conditions for achieving this goal; The emphasis on "the foundation of recovery is not yet firm" implies that the current monetary policy has not yet reached the adjustment stage, and helping to expand domestic demand is still the main line.

| Signal 2: The judgment of domestic inflation is more moderate

The central bank said that the inflation pressure is generally controllable in the short term. At present, China's economy is still in the process of recovery and development. The lack of effective demand is still the main contradiction. The industrial chain and supply chain operate smoothly, and the PPI growth is expected to remain low overall.

At the same time, we also need to pay attention to the uncertainty of the future domestic price trend. After the optimization of epidemic prevention and control, the consumption momentum may gradually increase; The economic vitality is further released, enterprises speed up the resumption of work and full production, and the accelerated recovery of the labor market may have an impact on future wage changes; Inflation in major developed economies is relatively stubborn, commodity prices are still under upward pressure, and high overseas inflation may also be transmitted to China through production, circulation and other links. We should strengthen monitoring, research and judgment, and continue to pay attention to the rebound pressure of inflation.

Compared with the central bank's emphasis on "paying high attention to the potential possibility of future inflation warming" last quarter, this overall statement is more moderate. This means that inflation will not form a strong constraint on monetary policy for the time being.

China's current inflation rate is about 2%, which is particularly due to the bumper grain harvest and the stability of energy prices. China's natural gas and oil prices are basically consistent with the international level, coal prices remain stable, and efforts are made to develop renewable and clean energy, which has played an important role in maintaining the basic stability of China's electricity prices. It is expected that China's inflation will remain in a moderate range in 2023.

| Signal 3: The tone of monetary policy has not changed

It continues the requirements of the Central Economic Work Conference for "accuracy and power"; Add "focus on supporting the expansion of domestic demand and providing more powerful support for the real economy", which is precise and powerful; The expressions of "cross-cycle regulation", "taking into account short-term and long-term" and "not engaging in flood irrigation" have not changed. A subtle change is to reintroduce "guiding market interest rates to fluctuate around policy interest rates".

We understand that this change is in line with the fact that the liquidity margin has converged since the beginning of the year, and the DR007 central bank has returned to the vicinity of the 7D OMO interest rate. At the same time, it also shows that after the DR007 returns to the vicinity of the policy interest rate, the central bank will stabilize and liquidity will not continue to tighten.

| Signal 4: The requirements for currency and credit are different from those of the previous quarter in three aspects

1. Delete the "three major constraints of liquidity, capital and interest rate of bank credit supply", which indicates that the three major constraints faced by bank expansion in the early stage have been initially relieved; Since the beginning of the year, the credit has been in the desirable range of the central bank, and the need for short-term policy increase to promote bank expansion has declined.

2. "Support financial institutions to meet the effective financing needs of the real economy in accordance with the principles of marketization and rule of law, and enhance the stability and sustainability of the growth of the total amount of credit", of which "stability and sustainability" is the focus, which may indicate that the follow-up policy does not want the total amount of credit to fluctuate too much, affecting the micro-expectation.

3. "We will continue to play the role of policy-oriented development financial instruments and better leverage investment". We understand that the effect of policy-oriented development financial instruments has been affirmed many times last year and will probably continue to be used in the future to expand effective investment.

| Signal 5: There are two obvious changes in structural tools

First, the central bank disclosed that it had set up a new toll road loan support tool in January 2023 to support relevant financial institutions to reduce the interest rate of toll road loans by 0.5 percentage points.

Second, the central bank disclosed the establishment of a 200 billion yuan guaranteed building loan support plan, which adopts the loan-first-borrow model, that is, financial institutions apply to the People's Bank of China for financial support after making independent decisions and issuing guaranteed building loans at their own risk. For loans that meet the requirements, the People's Bank of China will provide financial support at 100% of the loan principal.

| Signal 6: Limited interest rate reduction space

The central bank said that in 2022, faced with the challenge of tightening monetary policy in major developed economies, it did not choose to follow the interest rate increase from the perspective of giving priority to ensuring domestic development. In the case of limited space for interest rate reduction, it still moderately guided the policy interest rate downward to ensure that the interest rate is in a reasonable range, so as to first meet the needs of stabilizing domestic demand and employment.

The statement of "limited interest rate reduction space" reflects the purpose of the central bank to cherish the monetary policy space. According to the statement of the central bank officials, the space of monetary policy points to the two important aggregate tools of the statutory reserve ratio and interest rate, and also points to the space for reduction. In terms of interest rate, this space refers to the distance between policy interest rate and zero interest rate. At present, the key policy interest rates in China - the one-year MLF rate and the 7-day reverse repo rate are 2.75% and 2% respectively, which are still quite far from zero.

From the perspective of analysis, cherishing the normal monetary policy space does not mean that it is not loose. When necessary, it will also reduce the reserve requirement and interest rate to support economic growth, and take a "slow pace" posture.

Original link

http://www.pbc.gov.cn/zhengcehuobisi/125207/125227/125957/4584071/4804390/index.html