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Part 5 Monetary Policy Stance to Be Adopted in the
Next Period
Outlook for the Chinese economy
At the current stage, the Chinese economy is developing in the direction intended by the macroeconomic management policies and the national economy is expected to move toward stable and sustainable growth after the rapid rebound. In terms of external demand, despite uncertain factors such as the sovereign debt crisis in some European economies, the world economy has maintained a momentum of recovery. In terms of the domestic sector, in accordance with the new developments in economic performance, while maintaining consistency and stability, macroeconomic policies have become better targeted and more flexible since the beginning of 2010, with improvements in the intensity, pace, and priorities of policy measures. A number of measures have been launched to strengthen regulation over local government financing platforms and to guide the healthy development of the property market, playing a positive role to fend off potential fiscal and financial risks and to maintain the stable and healthy development of the economy. Furthermore, the central government has announced a series of new measures to support economic growth, focusing on revitalizing the emerging industries of strategic importance, speeding up the construction of government-subsidized housing and rebuilding shanty areas, encouraging and guiding private investment, accelerating development of the Xinjiang Autonomous Region, and promoting the develop-the-west strategy. All these measures will help accelerate economic restructuring and bring about the emergence of more sustainable economic growth points. Enthusiasm to speed up local development remains high and urbanization and upgrading of the consumption structure will continue to drive economic growth, all of which are conducive to achieving stable and relatively fast economic growth. The surveys conducted by the PBC on entrepreneurs, bankers, and urban depositors in the second quarter show that the major indicators continued to rise or stabilized to some extent and in general remained at high levels.
However, it should be noted that facing the complex and grave environment at home and abroad and a host of uncertain and destabilizing factors, macroeconomic policies still face a dilemma. The recovery of the world economy is not yet firmly based, and the international financial environment remains unstable. At home, the foundation for growth of domestic demand is not yet balanced; private investment and endogenous growth dynamics need to be strengthened; it is still an arduous task to improve income distribution and to promote economic restructuring; and energy conservation and emission reductions and fiscal and financial risks require attention. It is necessary to combine efforts to maintain the current stable and relatively rapid development momentum with initiatives to create sound conditions for long-term development, and to unswervingly speed up the shift in the economic growth pattern. The price situation remains complex, and management of inflation expectations must be reinforced. The global economic recovery is relatively slow; prices of primary commodities in the international market have generally stabilized; domestic production capacity is relatively adequate; the growth of the economy is more stable; and growth of money and credit supply has decelerated. All of these will help stabilize price levels. But inflation expectations and risks of upward prices should not be neglected. Affected by uncertain factors such as the sovereign debt crisis, countries are more prudent in their policy exit strategies and global monetary conditions are expected to remain accommodative. With excess capital looking for a variety of possible investment opportunities, inflationary pressures will remain. Rising labor costs, increasing resources, environmental protection costs, and the ongoing resource products pricing reform are likely to influence inflation expectations. The survey by the PBC on urban depositors in the second quarter indicates that the price satisfaction index dropped 4.2 percentage points in the second quarter from the previous quarter, hitting a historical low. The future price expectation index jumped to 70.3 percent, a relatively high level compared with the same periods in previous years.
Monetary policy in the next stage
Going forward, the PBC will continue to follow the scientific outlook on development, implement a moderately loose monetary policy in accordance with the overall arrangements of the State Council, and properly manage the policy’s intensity, pace, and priorities, maintain its consistency and stability, make it better targeted and more effective, properly handle the relationship between maintaining stable and relatively fast economic development, adjusting the economic structure, managing inflation expectations, improving the sustainability of using financial measures to support economic development, and safeguarding the healthy and stable development of the financial system. More efforts will be made to strengthen policy coordination and optimize the policy mix, with a focus on shifting to the institutional reform and economic restructuring so as to speed up the transformation of the economic growth pattern and to enhance endogenous dynamics for economic development.
First, the PBC will strengthen liquidity management and guide money and credit to grow at a proper pace. In view of the economic and financial developments and changes in foreign exchange flows, the PBC will deploy a wide range of monetary policy tools and carefully arrange the mix and terms of the policy tools and manage the intensity of monetary policy operations to enhance liquidity management, so that liquidity in the banking system will grow at a reasonable level and money and credit will grow properly, to satisfy credit demand for economic development and to create a sound monetary environment for keeping the general price level basically stable and for managing inflation expectations. It is necessary to guide financial institutions to properly pace the provision of loans around the year in line with the macroeconomic management policies and the needs of economic development.
Second, the PBC will step up financial support to promote transformation of the development pattern and economic restructuring. It will continue to implement differentiated credit policies and to improve the credit structure. Specifically, the PBC will enhance credit policies to support the weak links in the economy, employment, and education and emission reductions, phasing out the outdated capacity, emerging industries of strategic importance, and industrial relocation; continue to work hard in providing financial services to university graduates working as village leaders, earthquake and disaster relief efforts, poverty alleviation, and so forth; address the financing difficulties facing the agricultural sector and small enterprises; effectively solve the difficulties of SMEs in accessing loans; ensure that loans to key projects are granted; and rein in lending to high energy-consuming and polluting industries and industries with overcapacity. Efforts will be made to speed up innovation of rural financial products and services and actively explore new approaches for supporting agriculture with financial services so as to satisfy the demands of agriculture, rural areas, and farmers for multi-layered and diversified financial services. Measures will be adopted to implement differentiated mortgage policies to promote the healthy and stable development of the real estate market. Measures will be adopted to improve risk warnings to financial institutions and enhance management of risks of loans extended to local financing platforms. Moreover, establishment and improvements in the macro-prudential management framework will be explored and, taking advantage of a framework that works against the wind, raising capital restrictions and liquidity requirements for systemically important banks so as to maintain the soundness of the financial system, prevent systemic risks, and improve the sustainability of financial support to economic development.
Third, the PBC will steadily advance the market-based interest rate reform and improve the RMB exchange rate regime. It will press ahead with the establishment of a benchmark interest rate system on the money market to improve the pricing ability and strengthen the role of the price leverage. The PBC will, in accordance with the principles of reforming the RMB exchange rate regime, further improve the RMB exchange rate regime based on market supply and demand with reference to a basket of currencies. The exchange rate floating bands will remain the same as previously announced in the inter-bank foreign exchange market so as to keep the RMB exchange rate basically stable and at an adaptive and equilibrium level. The PBC will promote the development of the foreign exchange market and introduce more tools for managing exchange-rate risks. It will steadily advance the pilot program for RMB settlement of cross-border trade transactions to facilitate trade and investment and will support the going-global initiative. It will deepen the reform of the foreign exchange administration system to promote balanced capital flows. It will also regulate cross-border capital flows and step up monitoring and management of irregular and abnormal fund flows.
Fourth, the PBC will promote the healthy development of the financial market. The PBC will continue to deepen the reform of financial institutions, speed up the establishment of a modern financial enterprise system, and improve the system for organizations providing financial services. Efforts will be made to accelerate innovation of financial products and to strengthen the building of market infrastructure. It will broaden the channels for enterprises to access direct financing, accelerate the development of the bond market, and actively and prudently promote the opening-up of the inter-bank bond market.
In addition, it will be necessary to strengthen the coordination among fiscal, industrial, and monetary policies, with a focus on promoting reform and economic restructuring, so as to enhance the endogenous growth dynamics in the economy. Continued efforts should be made to reform the fiscal and tax systems, to relax further restrictions over investments and financing, to improve the income distribution structure, to strengthen the dynamism of the private sector, and to increase the disposable income of households. The market mechanism should be improved as well so that the market fully plays a fundamental role in resource allocations.
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