Pan Gongsheng: Financial "squeezing out water" does not mean a change in monetary policy stance. Including government bonds in the toolbox does not mean quantitative easing

On June 19, Pan Gongsheng, Governor of the People's Bank of China, stated at the Lujiazui Forum that since the beginning of this year, global inflation has cooled from high levels but still remains sticky. Some central banks like the ECB have started to cut interest rates, while others are still observing. It is expected that later this year, there may also be interest rate cuts, but overall, a high-rate, restrictive monetary policy stance is being maintained. China's monetary policy stance is supportive, providing financial support for the continued recovery and improvement of the economy.

The original speech is as follows:

The central bank will continue to adhere to a supportive monetary policy stance, strengthen countercyclical and cross-cyclical adjustments, support the consolidation and enhancement of the positive trend of economic recovery, and create a good monetary and financial environment for economic and social development. In regulation, the central bank will focus on handling three relationships well: First, the relationship between the short term and the long term. Maintaining price stability and promoting moderate price increases as important considerations, flexibly using policy tools such as interest rates and reserve requirements, while maintaining policy consistency without overly expanding. Second, the relationship between stabilizing growth and preventing risks. Balancing support for real economic growth with maintaining the health of financial institutions, persisting in preventing and resolving financial risks while promoting high-quality economic development. Third, the relationship between internal and external factors. Mainly considering the need to regulate the domestic economic and financial situation, taking into account the spillover effects of economic and monetary policy cycles in other economies.

Since the beginning of this year, the People's Bank of China, together with the National Bureau of Statistics, has optimized the quarterly calculation method of the financial industry's value added, changing from the previous calculation method mainly based on the growth rate of loans and deposits to the income method, which more accurately reflects the level of value added in the financial industry, weakening some local government and financial institution behaviors of "hitting the timing" of loans and deposits. At the same time, we have also noticed that after decades of commercialization and marketization, some financial institutions still have a strong "size complex" and achieve rapid expansion of scale through internal circulation and irrational competition, which is not desirable. For some market behaviors that are unreasonable and easily reduce the transmission of monetary policy, we strengthen regulation, including promoting balanced credit allocation, governance and prevention of fund idling, and rectifying manual interest subsidies. In the short term, measures to regulate these market behaviors will have a "squeezing effect" on financial aggregate data, but this does not mean a change in the monetary policy stance, but rather is more conducive to improving the efficiency of monetary policy transmission; conducive to balancing the pace of credit growth, alleviating distortions in resource allocation, reducing fund idling arbitrage, preventing and resolving financial risks; and conducive to providing high-quality financial services for economic and social development and the healthy development of financial institutions and financial markets.

Traditionally, we have paid more attention to financial aggregate indicators, but we are constantly optimizing and adjusting. In the past, monetary policy had specific target values for the growth rates of M2, social financing scale, and other financial aggregates. In recent years, quantitative targets have faded out, transitioning to qualitative descriptions such as "basically matching nominal economic growth." With the high-quality development and structural transformation of the economy, the growth of monetary credit needed by the real economy is also changing. The change in the growth rate of monetary credit aggregates is actually a reflection of the structural changes in China's economy and the related structural changes in China's financial supply side. From a mathematical relationship perspective, the growth rate is the ratio of the increment to the total stock. The numerator is the current increment, and the denominator is the total stock The growth rate of the total financial volume decreasing is natural, which is consistent with China's shift from high-speed growth to high-quality development. At the same time, it should be noted that many existing loans are not efficient. Revitalizing inefficient existing loans and new loans have essentially the same significance for economic growth. Looking at the changes in the credit structure, the proportion of real estate and local government financing platform loans in the current nearly 25 trillion yuan loan balance is significant. This part is not only no longer growing, but also declining. The remaining loans need to first fill the gap caused by this decline before they can be considered as incremental. It is difficult to maintain the overall credit growth rate at over 10% as in the past. From the statistics of money supply, adjustments need to be made to adapt to changing circumstances. China's M1 statistical caliber was established 30 years ago. With the rapid development of financial services facilitation, financial markets, mobile payments, and other financial innovations, the category of financial products that fall under the definition of money supply, especially M1 statistics, has undergone significant changes. It is necessary to consider dynamically improving the statistical caliber of money supply. From the perspective of the monetary function, it is necessary to study including personal demand deposits and some highly liquid financial products that even have direct payment functions in the scope of M1 statistics to better reflect the true situation of money supply. In the future, it is possible to continue optimizing the intermediate variables of monetary policy and gradually reduce the focus on quantity targets. When monetary credit growth has shifted from supply constraints to demand constraints, if the focus remains on quantity growth or even has a scale bias, it clearly contradicts the laws of economic operation. The total financial volume should be more of an observational, referential, and anticipatory indicator, with more emphasis on the role of interest rate regulation.

In the future, it may be considered to clearly define a certain short-term operating interest rate of the central bank as the main policy rate. Currently, the 7-day reverse repurchase operation rate has basically assumed this function. The rates of other term monetary policy tools can downplay the color of policy rates and gradually clarify the transmission relationships from short to long terms. At the same time, continuous reform and improvement of the Loan Prime Rate (LPR) market should be carried out. For issues where some quoted rates significantly deviate from the actual most favorable customer rates, the focus should be on improving the quality of LPR quotes to more accurately reflect the level of loan market rates. Currently, China's interest rate corridor has initially taken shape, with the upper corridor being the Standing Lending Facility (SLF) rate and the lower corridor being the excess reserve requirement rate, which is relatively wide overall. This is conducive to fully leveraging the role of market pricing, maintaining sufficient flexibility and agility. From the recent trend of money market interest rates, market rates have been able to operate steadily around the central policy rate, with a significantly narrowed fluctuation range. If there is a consideration in the future to further enhance the role of interest rate regulation, there is also a need to provide the market with clearer signals of interest rate regulation targets to boost market confidence. In addition to the need to clearly define the main policy rate mentioned earlier, it may also be necessary to moderately narrow the width of the interest rate corridor.

The Central Financial Work Conference proposed to enrich the monetary policy toolbox by gradually increasing the trading of government bonds in open market operations by the central bank. The People's Bank of China is strengthening communication with the Ministry of Finance to jointly study and promote implementation. This process is overall progressive, and the pace of government bond issuance, term structure, custody system, etc., also need to be simultaneously studied and optimized. It should be noted that including government bond trading in the monetary policy toolbox does not mean quantitative easing, but positioning it as a basic channel for currency injection and a liquidity management tool, involving both buying and selling In conjunction with other tools, create a conducive liquidity environment. The rapid development of the financial market also brings new challenges to central banks. The risk events of Silicon Valley Bank in the United States remind us that central banks need to observe and evaluate the condition of the financial market from a macro-prudential perspective, timely correct and block the accumulation of financial market risks, especially focusing on the mismatch of maturity and interest rate risks held by a large number of non-bank entities in medium and long-term bonds. It is important to maintain a normal upward sloping yield curve and keep the market positively incentivized for investment