On August 9, the People's Bank of China (hereinafter referred to as the "central bank") released the "Report on the Implementation of China's Monetary Policy for the Second Quarter of 2024" (hereinafter referred to as the "Report"), which pointed out that the main ideas of the next stage of monetary policy pointed out that the "Report" pointed out that the financing and monetary aggregates should maintain reasonable growth. Enrich and improve the method of base money delivery, and gradually increase the purchase and sale of treasury bonds in the open market operations of the central bank.

On the basis of summarizing the implementation of monetary policy in the first half of the year and comprehensively analyzing the current economic and financial situation, it also explained the policy orientation and focus of work in the next stage, releasing positive signals.

The monetary policy stance is supportive

Overall, the monetary policy stance since the beginning of this year has remained supportive, providing necessary financial support for the sustained recovery and stable development of the economy. The total financial volume has achieved reasonable growth, the credit structure has been continuously optimized, the financing cost has been stable and decreasing, and the renminbi has also shown a steady appreciation trend against a basket of currencies.

Specifically, monetary policy has adopted a three-stage "combination punch" to support the economic recovery:

Comprehensive support measures launched at the beginning of the year: In the face of market concerns about economic growth for the whole year at the beginning of the year, the central bank lowered the relending and rediscount rates for rural and small enterprises by 0.25 percentage points each on January 24, and implemented a 0.5 percentage point RRR cut, releasing more than 1 trillion yuan of medium and long-term liquidity. In addition, on February 20, the LPR with a maturity of more than 5 years fell by 0.25 percentage points, which is the largest decline since the LPR reform in 2019. These measures have effectively helped the economy get off to a good start.

Mid-year Structural Adjustments: Entering the mid-year, the PBOC continued to deepen its structural adjustment work. On May 17, in response to the pressure on the real estate market, the central bank launched a series of policy measures, including reducing the minimum down payment ratio of personal housing loans, canceling the lower limit of personal housing loan interest rates, lowering the interest rate of provident fund loans, and setting up a 300 billion yuan affordable housing refinancing plan. These measures have effectively mitigated the risks in the real estate market.

Deepening reform in the second half of the year: After the Third Plenum, the central bank actively responded to the central government's deployment and accelerated the pace of deepening reform. On 22 July, the PBOC lowered the open market 7-day reverse repo rate, the standing lending facility rate, and the LPR for maturities over 1 year and 5 years by 10 basis points each. Subsequently, on 25 July, the 1-year medium-term lending facility rate was cut by another 20bps. This series of interest rate cuts aims to further reduce the comprehensive financing cost of the real economy and consolidate the good momentum of the economic rebound.

Prevent and resolve financial risks in promoting high-quality economic development

In the process of promoting high-quality economic development, it is very important to prevent and resolve financial risks. To this end, the next phase of monetary policy will be guided by the following principles:

Prudent monetary policy: Monetary policy needs to be flexible, appropriate, precise and effective. This includes rationally regulating the relationship between the two major financing markets of credit and bonds, guiding the rational growth and balanced allocation of credit, maintaining reasonable and sufficient liquidity, and ensuring that the scale of social financing and money supply match the expected targets of economic growth and price levels.

Price stability: Maintaining price stability and promoting a moderate recovery in prices is one of the key considerations in formulating monetary policy. Strengthen policy coordination and cooperation to ensure that prices are at a reasonable level.

Market-oriented interest rate reform: Further improve the formation and transmission mechanism of market-oriented interest rates, and give full play to the guiding role of the central bank's policy interest rate. By unleashing the effectiveness of the reform of the loan prime rate (LPR) and the market-oriented adjustment mechanism of deposit interest rates, we will continue to improve the independent pricing power of financial institutions, so as to achieve the goal of reducing the financing costs of enterprises and residents.

Exchange rate management: Adhere to the market supply and demand-based, with reference to a basket of currencies for adjustment, a managed floating exchange rate system. Give full play to the decisive role of the market in the formation of the exchange rate, and at the same time take comprehensive measures to stabilize expectations, correct pro-cyclical behavior, avoid the formation of unilateral consistent expectations and self-reinforcement, resolutely guard against the risk of exchange rate overshoot, and maintain the basic stability of the RMB exchange rate at a reasonable and balanced level.

Risk prevention and control in key areas: Implement various risk prevention and mitigation measures for risks in key areas such as real estate, local government debt, and small and medium-sized financial institutions. Persist in preventing and defusing financial risks in the process of promoting high-quality economic development, and ensure the stability and sustainability of the financial system.

The market-oriented interest rate formation and regulation mechanism has been continuously improved

In Columns 1 and 2, the report focuses on the issue of interest rate mechanism, on the one hand, it sorts out the development process of the market-oriented reform of deposit and loan interest rates, and on the other hand, introduces the recent reform measures of the central bank in improving the interest rate control framework.

Industry insiders pointed out that interest rate liberalization has always been an important reform direction for the central bank to continue to promote. These two columns start from the perspective of steadily and prudently promoting and improving the interest rate formation and regulation mechanism, reflecting the central bank's requirements for deepening reform that can be both "lively" and "manageable".

In terms of the formation mechanism, with the continuous promotion of the central bank, the deposit and loan interest rates have been market-oriented. The loan interest rate is determined by the financial institution through independent negotiation with the customer based on its own cost of funds, risk premium and other factors, with reference to the loan prime rate (LPR). In general, the deposit interest rate is determined by the financial institutions according to the changes in the market interest rate and their own business needs.

According to industry insiders, since 2023, both corporate loan rates and fixed deposit rates have fallen by about 30 basis points.

In terms of the regulation and control mechanism, the central bank has further enhanced its ability to regulate and control interest rates by adjusting and optimizing open market operations. Specifically, the central bank's recent series of operations have effectively embodied the spirit of deepening reform and integrating reform into daily regulation and control.

Remind public investors to invest prudently and be alert to bond market risks

Since the beginning of this year, the bond market has continued to be hot, and the net value and annualized yield of related asset management products (hereinafter referred to as "asset management products") have risen, attracting the attention of many public investors. In Box 4, the report analyzes the impact of the net value mechanism of asset management products on public investors, and emphasizes that investors should invest prudently and be vigilant against bond market risks.

The interviewed experts believe that in the past few months, the central bank has alerted the market to the bond market risks through a variety of channels. The purpose of this column in this report is to remind the public investors to rationally assess market risks and prudently carry out investment activities in relevant asset management products.

In the net-worth environment, the investment returns and risks of asset management products are corresponding. The actual return of the product is ultimately determined by the dynamic changes in the market value of the underlying asset and is therefore uncertain. Investors should rationally judge the potential returns of different investment products based on their own risk tolerance. Although the deposit interest rate seems to be low, its return is certain and achievable, and for investors with a low risk appetite, deposit is a more rational choice.

In addition, since the beginning of this year, China's long-term bond interest rates have fallen, and some asset management products have increased their allocation to long-term bonds. In the short term, the rise in bond prices leads to an increase in the net value of the product. The column suggests that investors in asset management products should also pay moderate attention to the trend of long-term bond interest rates.

Industry experts said that in recent months, long-term bond yields have continued to decline rapidly, which not only reflects the market's pessimism about future long-term growth expectations, but may also be affected by short-term supply and demand fluctuations. Public investors should be fully aware of the risks in the bond market and make prudent investment decisions based on their own risk tolerance and investment objectives.