Price stability key priority for PBOC

Achieving price stability will be the key priority for the People's Bank of China, the central bank, while employment indicators will be a part of the monetary policy framework in setting policy goals, Sun Guofeng, head of the monetary policy department at the PBOC, said in an article published late on Wednesday.

China's monetary policy will seek to achieve a dynamic balance in a multiple-target system, he said, stressing the need to balance the relationship between risk prevention and economic growth stabilization, especially to maintain a stable macro leverage level.

Sun confirmed that the special and emergency monetary actions to mitigate the COVID-19 shocks will end appropriately and the central bank will use innovative structural policy tools to maintain liquidity at a reasonable and ample level.

China will "properly adjust some emergency monetary responses" conducted after the novel coronavirus outbreak, but ensure the consistency of policies, he said, stressing that financial activities should effectively serve the real economy under an advanced modern monetary policy framework.

His article, published on the PBOC website, talks about the need for a modern monetary policy framework, which requires optimized monetary policy mandates, achieved by innovative policy tools and an effective monetary policy transmission mechanism.

In the framework, the central bank should not adopt a "flood irrigation type" of easing and instead focus on avoiding a distorted price structure and asset bubbles triggered by high inflation and currency depreciation. At the same time, the PBOC should also prevent risks arising from a credit crunch. The PBOC should explore cross-cyclical measures and keep using conventional policy tools, he said.

For setting the intermediate target or the "anchor" of the monetary policy, Sun said the modern framework has readjusted the formula, using growth rates of broad money supply, or M2, and aggregate financing as the parameters which should basically match the growth pace of China's nominal gross domestic product.

Compared with other frameworks that target the real GDP, the modern monetary policy system includes inflation factors in the policymaking process, as it can better reflect the country's potential economic output and enhance the effectiveness of countercyclical adjustments, China Construction Bank said in a research note published on Thursday.

In terms of policy tools, the PBOC official put forward a system that assigns open market operation interest rates as the short-term policy rates, and the medium-term lending facility rates as the medium-term policy rates, which can influence financial market rates and banks' lending rates. The central bank will achieve the targets by adjusting policy rates, he said.

By November last year, the corporate loan rates declined to an average level of 4.62 percent, compared with 5.12 percent in December 2019, which was the lowest level since 2015, the PBOC said.

Ming Ming, a senior analyst with CITIC Securities, said that based on a stable policy stance, the PBOC is unlikely to cut interest rates or the reserve requirement ratio in the short term. But "a new policy framework" is needed to maintain an upward and normal yield curve, concentrating on the medium-term lending facility operations and forward guidance.

To support economic recovery, China's financial system waived profits of 1.5 trillion yuan ($231.6 billion) in favor of the real economy, through channels including interest rate cuts, the two innovative monetary policy tools providing direct support for the corporate sector, fee reduction, and support for enterprises' restructuring and debt-for-equity swaps, Sun said in his article.

By the end of last year, commercial banks had issued 1.2 trillion yuan worth of perpetual bonds, a fixed income security with no maturity date, which helped banks to augment capital resources and increase lending to the real economy, the central bank said.