Third Quarter Report on China's Monetary Policy Implementation: Firmly Preventing Exchange Rate Overshooting Risks and Maintaining the RMB Exchange Rate Basically Stable at a Reasonable and Equilibrium Level

According to the Zhitong Finance APP, on November 8, the People's Bank of China released the 2024 third quarter report on the implementation of China's monetary policy. It mentioned that the central bank will adhere to a market-based approach to supply and demand, reference a basket of currencies for adjustments, and maintain a managed floating exchange rate system, giving the market a decisive role in exchange rate formation. Comprehensive measures will be taken to strengthen expectation guidance, prevent the formation of unilateral consistent expectations that may become self-fulfilling, resolutely guard against the risk of excessive exchange rate fluctuations, and keep the RMB exchange rate basically stable at a reasonable and balanced level. The framework for macro-prudential policies and the mechanism for preventing and handling systemic financial risks will be improved to ensure that systemic financial risks do not occur.

The original text is as follows:

2024 Third Quarter Report on the Implementation of China's Monetary Policy

Summary

Since the beginning of this year, under the strong leadership of the Party Central Committee with Comrade Xi Jinping at its core, China has intensified macroeconomic regulation, focused on deepening reform and opening up, expanding domestic demand, and optimizing the economic structure, resulting in overall stable economic operation. In the first three quarters, the Gross Domestic Product (GDP) grew by 4.8% year-on-year, the Consumer Price Index (CPI) rose by 0.3% year-on-year, production and demand grew steadily, employment and prices remained generally stable, and high-quality development was solidly advanced. The People's Bank of China has adhered to Xi Jinping's Thought on Socialism with Chinese Characteristics for a New Era, earnestly implemented the decisions and deployments of the Party Central Committee and the State Council, and maintained a prudent monetary policy that is flexible, moderate, precise, and effective, increasing counter-cyclical adjustments to create a suitable monetary and financial environment for economic recovery.

First, maintain reasonable growth in money and credit. In February and September, the reserve requirement ratio was lowered twice by a total of 1 percentage point, releasing approximately 2 trillion yuan in long-term liquidity, and comprehensively using tools such as open market operations, medium-term lending facilities, and re-lending and rediscounting to conduct government bond trading operations, ensuring reasonable liquidity. Promote balanced credit allocation, activate inefficient existing financial resources, and enhance the quality and efficiency of services to the real economy. Second, promote a steady decline in the comprehensive financing costs of society. In January, the interest rates for re-lending and rediscounting for agriculture and small businesses were lowered by 0.25 percentage points, and in July and September, the interest rates for 7-day reverse repurchase operations in the open market were lowered by a total of 0.3 percentage points, continuing to promote the marketization of deposit rates and guiding the downward trend of market interest rates such as the Loan Prime Rate (LPR). Third, guide the adjustment and optimization of credit structure. Policies to support the real estate sector were introduced, the interest rates on existing housing loans were lowered, the minimum down payment ratio for first and second homes was unified, and re-lending for affordable housing was optimized; swap facilities for securities, funds, and insurance companies were created along with stock repurchase and increased lending to support the stable development of the stock market; the use of re-lending for technological innovation and technological transformation was promoted, and financial support for large-scale equipment updates and consumer goods replacement was increased; the recognition standards for inclusive small and micro loans were relaxed, the scope of support for carbon reduction tools was expanded, and existing structural monetary policy tools were effectively implemented. Fourth, maintain basic stability of the exchange rate. Adhere to the decisive role of the market in exchange rate formation, effectively utilize the exchange rate's adjustment function for the macroeconomy and international balance of payments, maintain exchange rate flexibility, and strengthen expectation guidance. Fifth, strengthen risk prevention and resolution. Improve financial risk monitoring and assessment, steadily and orderly advance the resolution of risks in key areas and key risk projects, orderly promote the resolution of debt risks for financial support financing platforms, and strengthen the construction of the financial stability guarantee system Overall, since the beginning of this year, the People's Bank of China has adhered to a supportive monetary policy, effectively supporting the economic recovery. The total financial volume has grown reasonably, with the social financing scale stock and broad money M2 increasing by 8.0% and 6.8% year-on-year respectively by the end of September, and new RMB loans of 16 trillion yuan in the first three quarters. The credit structure continues to optimize, with inclusive small and micro loans and medium to long-term loans for the manufacturing sector increasing by 14.5% and 14.8% year-on-year respectively by the end of September, both exceeding the overall loan growth rate. Financing costs have stabilized and decreased, with the weighted average interest rate for newly issued corporate loans in September at 3.51%, down 0.31 percentage points from the same period last year. The RMB has shown a stable increase against a basket of currencies, with the RMB exchange rate index from the China Foreign Exchange Trade System (CFETS) rising by 1.0% compared to the end of last year.

Currently, uncertainties in the external environment are increasing, global growth momentum is generally slowing, and the domestic economy still faces challenges such as insufficient effective demand and weak social expectations. However, the fundamentals of our economy are solid, and favorable conditions such as a vast market, strong economic resilience, and great potential remain unchanged. We must face difficulties, strengthen confidence, and respond actively. In the next stage, the People's Bank of China will adhere to Xi Jinping's Thought on Socialism with Chinese Characteristics for a New Era as guidance, fully implement the spirit of the 20th National Congress of the Communist Party of China, the Central Economic Work Conference, and the Central Financial Work Conference, maintain the general tone of seeking progress while ensuring stability, comprehensively and accurately implement the new development concept, unswervingly follow the path of financial development with Chinese characteristics, continuously promote high-quality financial development and the construction of a financial power, deepen financial system reform, accelerate the improvement of the central bank system, and further enhance the monetary policy framework. We will focus on balancing the relationships between short-term and long-term, stable growth and risk prevention, internal balance and external balance, firmly maintain a supportive monetary policy stance, increase the intensity of monetary policy regulation, improve the precision of monetary policy, and create a favorable monetary and financial environment for stable economic growth and high-quality development.

A prudent monetary policy should be flexible, moderate, precise, and effective. We will maintain reasonable liquidity, guide reasonable growth of credit, and ensure balanced distribution, keeping the social financing scale and money supply aligned with economic growth and price level expectations. Promoting a reasonable rebound in prices will be an important consideration in grasping monetary policy, ensuring that prices remain at reasonable levels. We will improve the market-oriented interest rate formation and transmission mechanism, strengthen the guiding role of the central bank's policy interest rates, enhance the effectiveness of the market interest rate pricing self-discipline mechanism and the market-oriented adjustment mechanism for deposit rates, improve the independent and rational pricing capabilities of financial institutions, and promote stable reductions in corporate financing and household credit costs. We will focus on key areas, maintain reasonable moderation, and continue to effectively implement the "five major tasks" of finance, strengthening quality financial services for major strategies, key areas, and weak links, enhancing the adaptability and precision of financial services to economic structural adjustments and dynamic balance. We will smooth the transmission mechanism of monetary policy, continuously enrich the toolbox of monetary policy, and improve the efficiency of fund utilization. We will adhere to a market supply and demand-based approach, adjust with reference to a basket of currencies, and implement a managed floating exchange rate system, giving the market a decisive role in exchange rate formation, comprehensively implement policies, strengthen expectation guidance, prevent the formation of unilateral consistent expectations that may self-fulfill, resolutely guard against the risk of excessive exchange rate adjustments, and maintain the RMB exchange rate basically stable at a reasonable and balanced level. We will improve the macro-prudential policy framework and the systemic financial risk prevention and disposal mechanism, ensuring that we do not experience systemic financial risks


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This article is compiled from the People's Bank of China, edited by Zhitong Finance: Chen Wenfang.