China's economy requires strong policy support, says PBOC Governor

• PBOC may cut RRR by 0.25-0.5 percentage points
  
  
• LPR reduced by 0.25 percentage points on Monday
  
  

Mysteel: China's current economic operations require strong policy support in terms of short- and medium-term macro-economic adjustments, said Pang Gongsheng, Governor of the People's Bank of China (PBOC), at a financial industry forum last Friday.

"The PBOC had earlier conducted in-depth research and prepared policy responses in advance, and the central government decisively introduced a package of stimulus measures, reflecting a firm commitment to stabilising the economy, expectations, and consumption and improving livelihoods, to which the market responded positively," Pan said.

On 24 September, China's financial regulators announced a package of policies to support economic growth. As of Friday, almost all of the policies previously announced by the PBOC had been implemented, including policies for the real estate sector and two tools aimed at stabilising the capital market, including the swap facility for securities, funds, and insurance firms and the special re-lending facility for stock buybacks and share increases by major shareholders.

"Depending on market liquidity conditions, the PBOC may reduce the reserve requirement ratio by another 0.25 to 0.5 percentage points before the end of the year," said Pan.

Earlier, the PBOC had lowered the reserve requirement ratio (RRR) by 0.5 percentage points and cut the seven-day reverse repo rate by 0.2 percentage points. The medium-term lending facility (MLF) rate was cut by 0.3 percentage points. On Monday (21 October), the loan prime rate (LPR) was reduced by 0.25 percentage points.

Pan noted that there are still some prominent challenges in China's economic operations, particularly in the real estate and capital markets, and both international experiences and China's past practices require targeted policies to address these issues.

In response to market concerns that the policy tools to support the capital market would directly provide funds to the stock market, Pan clarified that the "swap facility for securities, funds, and insurance companies" is not direct financial support to the market, nor does it expand the PBOC's base money supply. Meanwhile, the re-lending for stock buybacks and share increases are targeted measures, and it remains a regulatory red line that credit funds must not illegally enter the stock market.

To achieve superior development in the long term, China must maintain a dynamic balance between economic growth speed and quality, as well as between internal and external economic dynamics and between investment and consumption.

Macro-economic policies should shift from a past emphasis on investment to a more balanced focus on both consumption and investment, with greater emphasis on consumption, Pan said.

Regarding monetary policy frameworks, Pan emphasised the importance of fostering reasonable price increases and placing more emphasis on the role of interest rates and other price-based regulatory tools.

The PBOC will continue to diversify its monetary policy toolkit and expand the role of structural monetary policy tools. In open market operations, it plans to gradually increase the buying and selling of government bonds. Pan also mentioned that the PBOC has established a joint working group with the Ministry of Finance to continuously optimise relevant institutional arrangements.

On the issue of monetary policy transmission, Pan said that improving transparency is key, alongside enhancing the capacity of financial institutions to set rational and independent pricing. He also emphasised the importance of consistency between monetary policy and fiscal and between industrial and regulatory policies to improve the transmission efficiency of monetary policy.

"Modern technology innovation often requires long investment cycles and large capital requirements and entails high risks and uncertainties, leading to diverse financial service needs. Especially for companies in the seed or start-up phases, equity financing is critical, and active private equity (PE) and venture capital (VC) markets play a crucial role."

Pan stated that the PBOC will work closely with relevant departments to improve the financial support system for technological innovation and foster a financial market ecosystem that supports innovation.

Note: This article has been written in accordance with a content exchange agreement between MySteel and BigMint.