PBOC reiterates proactive monetary policy stance

The People's Bank of China, the central bank, said on Tuesday that it will continue to maintain a proactive monetary policy, that is flexible, targeted and lends support to the real economy.

The PBOC will introduce financial instruments to help cut carbon emissions and also encourage qualified financial institutions to offer preferential lending rates for projects that can facilitate the country's carbon neutrality targets, it said in its latest quarterly report.

At the same time, the central bank will also set aside enough room for conventional policy measures, while enhancing the macro-prudential management of cross-border capital flows.

Efforts will also be made to continuously improve the market-oriented interest rate system and the monetary policy transformation mechanism along with other steps like optimizing the deposit rate regulations and further lowering the lending rates, the report said.

The central bank has said that its interest rate policy framework is undergoing reform, which is aimed at gradually increasing the role of interest rates in financial markets and monetary policy, according to Louis Kuijs, head of Asia Economics at Oxford Economics.

The PBOC's open market operations focus more on short-term benchmark interest rates of the money market, such as the seven-day reverse repo rate, which remained stable during the first quarter at around 2.2 percent.

However, there has been a decline in the interest rates for bonds. In March, the yield of the 10-year Treasury bonds issued by the Ministry of Finance fell to 3.22 percent, compared with 3.25 percent in December.

At the same time, yields on United States' Treasurys have risen, with yield on the 10-year Treasurys rising to 1.74 percent by the end of March, compared with 0.51 percent a year ago.

Much aggressive fiscal stimulus and stronger economic recovery expectations in the US have resulted in rising inflation expectations and real interest rates, said the PBOC report.

It also analyzed possible influences of the surge in US bond yields and said the same could boost global asset prices, trigger more capital flows to the US from emerging markets, and increase debt and currency depreciation risks in emerging economies.

Oxford Economics researchers expect US policy rates to start rising in 2023. But with inflation likely to remain contained after the recent spurt in COVID-19 cases this year, the US Federal Reserve is expected to increase rates only gradually and modestly.

Effects from the US bond yield hike and the possible increase in US policy rates will remain limited and controllable in China, said the central bank report, adding that macro-prudential management of cross-border capital flows should be enhanced.

With the economic recovery from COVID-19 on track, Chinese policymakers are looking to normalize the monetary policy stance in order to contain leverage and financial risks and prevent asset bubbles, experts said.

"We expect China's policy rates and bond yields to pick up in the coming years ... International factors will have a relatively modest impact in China, compared to domestic factors," Kuijs said.

In another development, a PBOC report said on Wednesday that the year-on-year growth of money supply last month in China was at 8.1 percent, 1.3 percentage points lower than the growth rate in March.

The new yuan loans increased by 1.47 trillion yuan, and the outstanding loans increased by 12.3 percent on a yearly basis, down from 12.6 percent in March, the official statistics showed.