At the 2024-2025 China Economic Annual Conference held at the China Center for International Economic Exchanges, Wang Xin, director of the Research Bureau of the People's Bank of China, said that it is necessary to moderately increase monetary policy support, reduce the RRR and interest rates in a timely manner, and increase monetary and credit investment.
Overall, next year's moderately loose monetary policy will build on this year's supportive stance. Compared with last year's Central Economic Work Conference, the latest Central Economic Work Conference on monetary policy, in addition to proposing "moderate easing", the relevant liquidity statement is more concise, directly "maintaining abundant liquidity".
Set the tone for moderate easing
On November 8, when the central bank released the third quarter monetary policy implementation report, authoritative sources pointed out that the future monetary policy will continue to maintain a supportive stance. Although the monetary policy has nominally remained "prudent" since the beginning of this year, it has actually adopted moderately loose measures to cope with the difficulties and challenges in economic operation.
PBOC Governor Pan Gongsheng has stressed on several occasions that the PBOC will firmly support its monetary policy stance. In the face of the current uncertainty in economic operation and changes in the external environment, the market generally expects that the future monetary policy will continue to provide sufficient support for the real economy and ensure the steady and healthy development of the economy.
In September this year, Lian Ping, chief economist of the Guangkai Chief Industry Research Institute and chairman of the China Chief Economist Forum, and Liu Tao, a senior researcher, jointly wrote an article pointing out that in view of the current economic situation, it is necessary and conditional to adjust monetary policy to "moderate easing". They believe that from the perspective of strengthening expectation management and effectively guiding market expectations, timely and reasonable adjustment of monetary policy will not only help boost market confidence, but also change the current situation of weak market expectations.
Lian Ping and Liu Tao's article further analyzes that through reasonable monetary policy adjustments, market sentiment can be better stabilized, and the confidence of market players can be enhanced, thereby creating favorable conditions for economic recovery. This policy orientation not only meets the actual needs of current economic development, but also contributes to long-term economic restructuring and high-quality development.
Whether it is the official statement of the central bank or the suggestions of experts and scholars, they all point to the same direction: in the coming period, monetary policy will continue to maintain support for the real economy, adjust policy tools in a timely manner, to cope with internal and external challenges, and promote sustained and healthy economic development.
The central bank expands its macro-prudential and financial stability functions
At the Central Economic Work Conference, it was clearly proposed to "explore and expand the macro-prudential and financial stability functions of the central bank, innovate financial instruments, and maintain the stability of the financial market". This policy direction aims to further enhance the role of central banks in maintaining financial market stability through innovative financial instruments.
The reporter noted that at the annual meeting of the 2024 Financial Street Forum, Pan Gongsheng, governor of the central bank, revealed in his keynote speech that the People's Bank of China and the China Securities Regulatory Commission jointly formulated two tools to help the stable development of the capital market. Both tools are designed based entirely on market-oriented principles and have a proven track record of successful international practice. Specifically:
Securities, funds, and insurance company swap facilities: This tool does not provide financial support directly to the market by the central bank, so it does not expand the central bank's money supply or base money supply. It aims to facilitate liquidity management among financial institutions and enhance market stability.
Funds for stock repurchase and refinancing of shareholdings: This part of the funds provided by the central bank has a specific orientation and is mainly used to support eligible enterprises to carry out share repurchase or increase holdings. It is worth noting that the prohibition of credit funds from entering the stock market in violation of regulations is still an important red line in financial supervision.
Pan Gongsheng stressed that these two tools reflect the new exploration and expansion of the central bank's function in maintaining financial stability, and mark a new step for the central bank in participating in and regulating the capital market.
Lian Ping said in an interview with reporters that in the past, the central bank mainly adjusted the liquidity of the banking industry (such as cutting the reserve requirement ratio and interest rates), participating in the foreign exchange market (such as purchasing foreign exchange reserves), and participating in a small amount of treasury bond trading. In the future, central banks may need to increase their participation in the entire capital market, including the bond market and the stock market, to better cope with the complex and volatile financial environment and maintain the overall stability of the financial market.
The decline could be between 0.25 and 0.5 percentage points
1. Monetary policy adjustment expectations
At the recent Central Economic Work Conference, the possibility of "cutting the reserve requirement ratio and interest rates in a timely manner" was mentioned. Zhang Xu said that judging from the current market situation, it is expected that there will be a RRR cut in the near future, which may be between 0.25 and 0.5 percentage points. For the full year, RRR cuts are expected to reach around 1.5 percentage points in 2024, while rate cuts are likely to be 20 to 30 basis points (BP). Zhang Xu also pointed out that if the expectations of market players can be effectively stabilized and the market vitality can be fully stimulated, then the monetary policy easing next year may be smaller than predicted.
Wang Qing, chief macro analyst of Oriental Jincheng, and his team believe that the central bank will continue to implement a strong policy of RRR and interest rate cuts in 2025, of which the policy rate cut may reach 0.5 percentage points, which is significantly higher than the 0.3 percentage point rate cut this year. In addition, the interest rates of various structural monetary policy instruments will also be lowered in due course to guide enterprises and households to further reduce their financing costs. Wang Qing's team specifically mentioned that it is not ruled out that the targeted interest rate reduction of residential housing loans will be carried out by greatly guiding the downward trend of LPR quotations of more than 5 years, which will be a key measure to promote the real estate market to stop falling and stabilize. With the weakening of the financial "crowding" effect, the scale of new credit and social financing is expected to resume rapid growth next year.
2. Outlook for the bond market
According to the latest China Economic and Financial Outlook Report released by the Bank of China Research Institute, the bond market will show the following characteristics in 2025:
Liquidity remains accommodative: As the PBOC adheres to a supportive monetary policy stance, the overall liquidity in the bond market will continue to remain reasonably abundant.
Bond supply continues to increase: The issuance scale of government bonds, local government bonds, interbank certificates of deposit, and financial bonds is expected to remain at a high level, and the issuance of bonds will maintain steady growth.
Long-term Treasury yields will fall steadily: The downward trend of short-term Treasury yields will flatten out, and the overall Treasury yields will fall appropriately, and credit spreads may narrow.
Improved default risk: There have been no more bond defaults in the real estate sector since August 2024. With the extension of the "16 Policies on Real Estate Finance" and the stabilization of the bottom of the real estate market, the liquidity of key bond issuers will further improve.
Strong demand from institutional investors: The demand for personal pension reserves and the preservation and appreciation of insurance funds continues to increase, and the demand for bonds from institutional investors such as bank wealth management, insurance asset management, funds, and trusts will continue to be strong.
Monetary and fiscal policy in 2025 will work together in financial markets, especially bond markets. Through the appropriate policy of reducing the reserve requirement ratio and interest rates, combined with a proactive fiscal policy, it can effectively promote stable economic growth and maintain the healthy operation of the financial market. At the same time, the good development trend of both supply and demand in the bond market will also provide more opportunities and support for investors.
