On the evening of May 10, the People's Bank of China released China's monetary policy implementation report for the first quarter of 2024, pointing out that the next stage of prudent monetary policy should be flexible, moderate, precise and effective.

The central bank mentioned that it will promote the steady decline in corporate financing and household credit costs, smooth the monetary policy transmission mechanism, avoid the idling of capital precipitation, resolutely prevent the risk of exchange rate overshoot, and maintain the basic stability of the RMB exchange rate at a reasonable and balanced level.

Transform the traditional thinking of one-sided pursuit of scale

"A prudent monetary policy should be flexible, moderate, precise and effective." The report pointed out that it is necessary to rationally grasp the relationship between the two largest financing markets, bonds and credit, guide the rational growth and balanced supply of credit, maintain reasonable and abundant liquidity, and keep the scale of social financing and money supply in line with the expected targets of economic growth and price levels.

Judging from the financial data in the first quarter, the total financial volume grew steadily, and the pace of credit became more stable, leaving room for loan delivery in the next three quarters. A reporter from Shanghai Securities News recently learned from a number of commercial banks that the growth rate of loans in April was relatively stable, "small months are not small", and financial support remained stable.

At present, China's total credit has slowed down from a high growth rate of more than double digits in the past to single digits, but this does not mean that financial support for the real economy has weakened. In this regard, the report analyzes, first of all, the economic restructuring, transformation and upgrading are accelerating; secondly, when the scale of credit stock is large, the marginal effect of continuing to increase credit supply decreases; Finally, direct financing has a benign substitution effect.

The report makes it clear that in the next step, it is necessary to change the traditional thinking of one-sided pursuit of scale, and pay more attention to grasping the tightness and moderation of the financing environment at the macro level.

The supply and demand of the bond market are expected to further equilibrium

Since 2024, China's medium and long-term bond yields have fallen significantly. The report's op-ed "How to view the current long-term Treasury bond yield" argues that long-term Treasury bond yields mainly reflect long-term economic growth and inflation expectations, but are also disturbed by factors such as the lack of safe assets.

"China's long-term treasury bond yields are generally effective in reflecting market expectations and macroeconomics." According to the report, in recent years, the countercyclical adjustment of monetary policy has been strong, which has continuously created a good liquidity environment for the smooth operation of the bond market. This year, the intensity of the proactive fiscal policy is relatively large, and the scale of government bonds planned to be issued is not small, and the pace of issuance will be accelerated. The supply and demand of the bond market are expected to further balance, and the yield of long-term government bonds will be more compatible with the future economic upswing.

Long-term Treasury yields have recovered since late April. Domestic economic indicators continue to improve, market confidence in economic growth has been further strengthened, and expectations for inflation bottoming out and rebounding are more consistent. Judging from the recent yield trend, after the People's Bank of China repeatedly spoke out on long-term government bond yields, the market investment strategy has also been adjusted, investors pay more attention to the interest rate risk of long-term bond investment, and investment behavior tends to be stable and rational.

Financial support for the real economy

The People's Bank of China focuses on guiding financial institutions to strengthen the balanced allocation of credit, leaving reserve momentum to support the real economy and improving the quality, efficiency and stability of credit growth. In the first quarter, the phenomenon of financial institutions' credit surge has eased, and the pace of investment has become more balanced while maintaining support for the real economy.

The People's Bank of China has continuously deepened the market-oriented reform of interest rates, giving full play to the effectiveness of the reform of the loan market quotation rate (LPR) and the market-oriented adjustment mechanism of deposit interest rates, and promoting the steady decline of loan interest rates. In March, the LPR of 1 year and more than 5 years was 3.45% and 3.95% respectively, unchanged and down 0.25 percentage points from December last year, respectively. The weighted average interest rate of new loans was 3.99%, down 0.35 percentage points year-on-year.

It is worth noting that the report focuses on the analysis of the relationship between credit growth and high-quality development, emphasizing that China's total credit has slowed down from a high growth rate of more than double digits in the past to single digits, but this does not mean that financial support for the real economy has weakened, and the reasons include three aspects: economic restructuring, transformation and upgrading are accelerating; When the scale of credit stock is relatively large, the marginal effect of continuing to increase credit supply decreases; The benign substitution effect of direct financing.

Loans are mainly invested in the asset-heavy sector

At present, China's loan balance is nearly 250 trillion yuan and the deposit balance is nearly 300 trillion yuan. Through the column "Looking at the Flow of Funds from the Distribution of Deposit and Loan Structure", the report analyzes the flow of bank deposits and loans, and uses data to answer the question of "where does the money go, where does the money go", as well as the market's question about "why the trend of financial and economic data is inconsistent".

From the perspective of "where does the money go", the report shows that in the past, China's loans were mainly invested in enterprises. In terms of industry and term structure, heavy asset sectors such as infrastructure, real estate and manufacturing are the mainstay, and medium and long-term loans are the majority. However, due to the lack of effective consumer demand, the supply side of the real economy and the investment field have received more financing, which also explains to a certain extent why China's inflation remains low in the context of high global inflation.

What is the next move of monetary policy?

The report proposes that in the next stage, a prudent monetary policy should be flexible, moderate, precise and effective. We should rationally grasp the relationship between the two largest financing markets, bonds and credit, guide the rational growth and balanced distribution of credit, maintain reasonable and abundant liquidity, and keep the scale of social financing and money supply in line with the expected targets of economic growth and price levels.

Maintaining price stability and promoting a moderate recovery in prices should be taken as an important consideration in grasping monetary policy, and policy coordination and cooperation should be strengthened to keep prices at a reasonable level. We will continue to deepen the market-oriented reform of interest rates, give full play to the role of the reform of the loan market prime interest rate and the market-oriented adjustment mechanism of the deposit interest rate, and promote the steady and moderate reduction of corporate financing and household credit costs.