On 13 February 2025, the PBOC disclosed the Report on the Implementation of China's Monetary Policy for the Fourth Quarter of 2024 (the "Implementation Report"). In 2024, monetary policy will adhere to a supportive stance and strongly support the economic recovery. At the end of the year, the stock of social financing and broad money M2 increased by 8.0% and 7.3% year-on-year respectively, and the balance of RMB loans reached 255.7 trillion yuan. The renminbi appreciated against a basket of currencies, with the China Foreign Exchange Trade System (CFETS) renminbi exchange rate index rising 4.2% at the end of the year compared to the end of the previous year.

In the short term, the central bank may focus more on stabilizing the exchange rate, and the policy may still focus on revitalizing the stock at the aggregate level, and the incremental policy may need to wait until the specific implementation of the fiscal plan of the two sessions and the easing of exchange rate constraints before the opportunity to be introduced.

Maintain the smooth operation of the capital market

In the report, two important capital market support tools are explained in detail. As of the end of January 2025, two operations of the swap facility have been carried out, with a total amount of 105 billion yuan, which has significantly promoted the growth of the scale of investment in proprietary stocks of securities companies. At the same time, by the end of 2024, the upper limit of the amount of loans disclosed by China's listed companies to apply for repurchase and increase in holdings is close to 60 billion yuan; In 2024, the upper limit of the amount of the disclosed repurchase and major shareholder shareholding increase plan will reach a record high of about 300 billion yuan.

Support tools play a backing role

To a certain extent, these two tools have played a role in stabilizing the market and helping to maintain the smooth operation of the capital market. Experts pointed out that after the creation and release of these tools, the A-share market rose rapidly, which greatly boosted market confidence. Especially during market downturns, the effect of these two tools is particularly noticeable, injecting vitality into the market.

Responsibilities and Actions of Listed Companies

Market participants said that in recent years, the financial regulatory authorities have taken a series of measures to maintain the healthy development of the capital market. As the direct beneficiaries of the steady rise in stock prices, listed companies and securities fund companies should also give full play to their own subjective initiative and professional ability, actively carry out market value management, and convey to the market firm confidence in the development of the company and industry, so as to maintain the stability of stock prices and promote the smooth operation of the stock market.

In addition, in order to achieve long-term stability and prosperity of the capital market, it is necessary to pay attention to the coordinated development of investment and financing functions. For a long time, there has been a phenomenon of "heavy financing and light returns" in China's capital market, and investors mainly rely on capital gains in the secondary market to obtain income, which is easy to lead to large fluctuations in the market. Therefore, market participants believe that although these two tools can provide certain support and support for the capital market in the short term, in the long run, the key to promoting the stable and healthy development of the capital market lies in improving the construction of the system, balancing the dual functions of investment and financing, and giving full play to the strength of the market itself.

Improve the quality and efficiency of consumer finance policies

The Central Economic Work Conference listed "vigorously boosting consumption, improving investment efficiency, and expanding domestic demand in all directions" as the top priority. At present, China is in a critical period of economic structural transformation, and the idea of macroeconomic regulation and control is speeding up the adjustment and optimization. A moderately loose monetary policy will create favorable conditions for this transition, increasing its contribution to economic growth by providing greater support for consumption.

Emphasis on improving the quality and efficiency of consumer finance policies

In particular, the report emphasizes the continuous improvement of the quality and effectiveness of consumer finance policies, proposing to increase financial support for key consumer sectors such as automobiles, home appliances, home furnishings, and culture, tourism and sports, and encourage the trade-in of consumer goods. Guiding financial institutions to improve their internal mechanisms and enhance their financial service capabilities in these areas aims to promote consumption upgrading and stimulate market vitality.

The market-oriented reform of interest rates has achieved remarkable results

In 2024, the People's Bank of China implemented a series of important measures in shifting to price control. After years of market-oriented interest rate reform, China has basically established an effective mechanism for the formation, regulation and transmission of interest rates. After several RRR and interest rate cuts, the current interest rate level is at a historical low, which not only continues to stimulate consumer demand, but also provides a strong impetus for investment.

However, despite the overall downward trend in the cost of social financing, there are still some challenges. The key to future work is to find a balance between supporting the real economy and maintaining the healthy development of financial institutions. Experts suggest that banks should be guided to establish the concept of independent and rational pricing to prevent the problem of continuous narrowing of banks' net interest margins due to excessive competition.

Transformation of the monetary policy framework

The report has five columns, four of which focus on the history and innovation of monetary policy tools, including traditional tools such as reserve requirements, relending, and open market operations. This reflects the important role of monetary policy tools in supporting the economic recovery.

Major monetary policy adjustments in 2024

In 2024, the People's Bank of China implemented four rounds of major monetary policy adjustments, using a combination of traditional and innovative monetary policy tools to support economic recovery and development. For a long time, the People's Bank of China (PBoC) has ensured reasonable and sufficient liquidity in the banking system by flexibly using the three traditional tools of deposit reserves, re-lending and re-discounting, and open market operations, creating a suitable monetary and financial environment for the steady and healthy development of the real economy.

Dynamically evolving monetary policy tools

Experts pointed out that "the three traditional monetary policy tools are not static, but dynamically evolve according to the economic and financial operation and macroeconomic control needs." "The monetary policy toolbox continues to evolve and needs to be viewed from a dynamic perspective. In different situations, the PBOC will adopt different tools to address the challenges and even innovate new ones. In general, the entire instrument system is constantly improving in the direction of better adapting to the needs of macroeconomic regulation and control and the development of the financial market.

Coordination and systematization between tools

In addition, the exploration and coordination between different instruments also reflect systematic considerations, serving the goal of sounding and improving the monetary policy regulatory framework. For example, the overall reduction in the statutory reserve requirement ratio has kept the liquidity of the banking system at a high level, creating conditions for shifting from aggregate control to interest rate control. In this process, the structured refinancing facility assumes a skewed support for key areas, helping to direct financial resources to those most in need.

Improvement of the interest rate control mechanism

This series of policy adjustments, coupled with the improvement of the interest rate control mechanism, has promoted the continuous transformation of the monetary policy framework. At present, the policy interest rate has been clarified, the relationship between various interest rates has been further straightened out, the interest rate corridor mechanism has been gradually improved, the implementation of interest rate policy has become more standardized, and the transmission of interest rate policy has become smoother and more effective.

Policy Ideas and Investment Suggestions

The policy ideas of the Implementation Report are basically consistent with the main views of the fourth quarter regular meeting of the Monetary Policy Committee of the People's Bank of China and the 2025 work conference. Based on the consideration of the balance between interest rates and exchange rates, the PBOC may pay more attention to stabilizing the exchange rate in the short term, especially in the context of the continued strength of the US dollar and the depreciation pressure on the RMB. As a result, the implementation of the new incremental policy may be delayed and is more likely to be implemented in March or early Q2.

Stabilize the exchange rate and coordinate finance

On the one hand, during the two sessions, the specific strength of fiscal force may be further clarified, which provides an opportunity for the central bank to coordinate and cooperate according to the actual situation; On the other hand, the direction of a series of policies such as US tariffs may also gradually become clearer, which will help reduce the depreciation pressure on the RMB, thereby creating room for the domestic central bank to further ease monetary policy.

For the bond market, the basic logic of China's bond bullish remains solid. Trade frictions have increased economic uncertainty, which will further push bond yields downward. However, in the short term, as exchange rate constraints remain in place, and China's monetary policy easing will also be limited if the United States does not cut interest rates for the time being, short-term interest rates may fall more slowly than expected.

Nevertheless, given that the need for domestic demand to support the bottom still exists, further interest rates need to be lowered at the policy level to stimulate economic growth. This means that while the yield curve is likely to flatten in the short term (i.e., long-end interest rates are falling faster than short-end rates), the pressure on the RMB exchange rate is expected to be less as the US economy and equity markets are likely to pull back, and the Fed considers cutting interest rates again. At that point, China is likely to cut interest rates more smoothly and lower money market rates, and the yield curve will resume its bull steepening trend.

In view of the above analysis, it is recommended that bond investors actively allocate bonds in the first quarter and wait for the return on investment brought by the decline in interest rates. Despite the volatility and challenges in the short term, the outlook for China's bond market remains positive in the long run as the domestic and international economic environment changes.