On August 17th, the People's Bank of China released the "Report on the Implementation of China's Monetary Policy for the Second Quarter of 2023". The report points out that in the next stage, the People's Bank of China will increase its macroeconomic policy regulation efforts. A prudent monetary policy needs to be precise and powerful, better leverage the dual functions of monetary policy tools in terms of quantity and structure, and firmly support the recovery and development of the real economy. With the goal of maintaining the basic stability of the RMB exchange rate at a reasonable and balanced level, we will comprehensively implement policies and stabilize expectations, correct market procyclical and unilateral behavior, and resolutely prevent the risk of exchange rate overshoot.

Starting from August, CPI is expected to gradually rebound. The report believes that the macroeconomic situation is expected to continue to improve and will be more closely matched with financial data in the future. Economic recovery is a process of wave like development and winding progress, and both post epidemic consumption and economic recovery require time. From the current situation, the economic recovery after the epidemic has entered a normal track. Regarding the price trend, the report believes that prices are expected to bottom out and rebound. Overall, the estimated rate of price increase is already at a low level within the year. Recently, pork prices have stabilized and rebounded, tourism travel prices have significantly increased, and domestic refined oil prices have also experienced "four consecutive increases". It is expected that the CPI (Consumer Price Index) will gradually rebound from August and show a U-shaped trend throughout the year; The PPI (Production Price Index) has bottomed out and rebounded year-on-year in July, and the future decline will tend to converge. In the medium to long term, China's economy is generally balanced between supply and demand, with stable monetary policy and stable inflation expectations among residents. There is no foundation for long-term deflation or inflation. Regarding the judgment of overseas inflation, the report believes that the overall easing of inflation pressure in major external economies, but the rate of inflation decline is still relatively slow, and the future process of inflation decline may be more tortuous.

02 | Relaxation and Boosting Power are on the Way. Regarding the next stage of monetary policy, the report re mentions "increasing macroeconomic policy regulation" and "better leveraging the dual functions of monetary policy tools in terms of quantity and structure", and removes the statement "doing well in cross cycle adjustment" from the first quarter report; At the same time, it is pointed out that the policy objective has changed from the "three balances" in the first quarter (balancing short-term and long-term, economic growth and price stability, internal balance and external balance) to "continuously promoting the continuous improvement of economic operation, the continuous enhancement of endogenous power, the continuous improvement of social expectations, and the continuous resolution of risks and hidden dangers". Reflects two signals: firstly, the direction of future monetary easing is clear; Secondly, the current policy focus has shifted to fully stabilizing growth, enhancing confidence, and mitigating risks. It is expected that monetary policy will intensify in the following aspects: firstly, in terms of liquidity, it is worth looking forward to reducing reserve requirements. If the report adds "comprehensively utilizing multiple monetary policy tools to maintain reasonable and sufficient liquidity", it means that the central bank's monetary policy toolbox has been reopened; At the same time, in the face of the continuous decline in domestic credit growth since the second quarter, the report proposes to "maintain a moderate amount of monetary credit and a stable pace", which means that the demand for stable credit and effective financing in the second half of the year is still relatively strong. Lowering reserve requirements is not only beneficial for releasing long-term low-cost funds for banks, easing liquidity constraints, enhancing their willingness and ability to provide credit, but also boosting confidence, improving expectations, and increasing credit demand. Secondly, in terms of price, there is still room for physical cost reduction. This report clearly points out the need to "promote stable and moderate reduction in corporate financing and resident credit costs". Compared to the statement in the first quarter report that "maintain a reasonable and moderate interest rate level", the willingness to promote entity cost reduction is significantly stronger. In June, the weighted average interest rates for general loans and personal housing loans in China were 4.48% and 4.11%, respectively, slightly decreasing by 5BP and 3BP compared to the first quarter, both of which are already at historically low levels. It is expected that with the implementation of interest rate cuts in June and August, the downward space for financing costs for enterprises and residents is expected to further open up, or there may be a significant decline. In order to promote the stable development of the real estate market, it is expected that the reduction in personal housing loan interest rates is expected to be even greater. In addition, current physical demand is insufficient, real estate is still bottoming out, private enterprise investment confidence is not strong, and the foundation of economic recovery is not yet solid. If the subsequent economic recovery continues to fall short of expectations, the possibility of multiple interest rate cuts cannot be ruled out.

03 | Exchange Rate: Adhere to the principle of "me first". This report has a lot of emphasis and significant changes in exchange rate related expressions. Specifically, it sends two signals to the market: firstly, the report insists on emphasizing the policy stance of "me first and balancing internal and external balance", indicating that in the choice between "stable growth" and "stable exchange rate", stable growth and expanding domestic demand are given higher priority. Since the second quarter, facing the situation of insufficient domestic demand and rising pressure from the depreciation of the RMB exchange rate, the central bank has cut interest rates twice in June and August, which is a full manifestation of the fact that I am the main player. In addition, in Column 4, the central bank also explicitly stated that "the RMB exchange rate reflects the price comparison relationship between the RMB and other currencies, which is influenced by various internal and external factors, with high short-term uncertainty and uncertainty, but fundamentally depends on economic fundamentals in the long run." This means that maintaining economic stability without stalling is an important prerequisite for long-term exchange rate stability. Secondly, we attach great importance to the recent high volatility of exchange rates and emphasize the need to resolutely prevent the risk of exchange rate overshoot when necessary. For example, in this report, the reference to "enhancing exchange rate flexibility" in the first quarter has been deleted, and statements such as "comprehensively implementing policies, stabilizing expectations, making good use of various regulatory reserve tools, regulating supply and demand in the foreign exchange market, correcting market procyclicality and unilateral behavior, and resolutely preventing the risk of exchange rate overshoot" have been added. This reflects the high attention paid by the central bank to the recent significant fluctuations in exchange rates. At the same time, it emphasizes that it has sufficient policy tool reserves, confidence, conditions, and ability to maintain the smooth operation of the foreign exchange market. It is not ruled out that the central bank will guide exchange rate expectations and prevent major fluctuations in exchange rates by adjusting foreign exchange risk reserves and deposit reserve ratio, increasing the use of countercyclical factors, and other means in the future.

04 | What are the company's expectations? The investment expectations of enterprises mainly focus on M1 year-on-year. In July, M1 decreased by 2.3% year-on-year for three consecutive months. From a historical perspective, the year-on-year changes in M1 do have a certain degree of leading significance for enterprise inventory and industrial product prices. If M1 bottoms out and rebounds year-on-year, corresponding to the next two to three quarters, enterprises are expected to start a replenishment cycle, and industrial product prices are expected to continue to rise year-on-year; But if M1 is weak in the short term compared to the same period last year, it means that we need to be patient with the continuous improvement of enterprise replenishment and PPI compared to the same period last year. 05 Jingtai Viewpoint | Can Monetary Policy Continue? In this financial report, the central bank mentioned some challenges facing the current domestic economy: unstable income expectations for residents, time required for consumption recovery, insufficient confidence in private investment, difficulties in some enterprises' operations, relocation of production lines in some industries, and increased pressure on local fiscal balance. In summary, the current predicament of the domestic economy is mainly due to weak expectations of residents and enterprises. Therefore, as long as there is no significant improvement in residents and enterprises' expectations, the central bank's more proactive monetary policy will continue for a period of time.