Central bank's supervisory media: Industry experts remind that the current market may have a tendency to rush ahead regarding monetary easing

Since the Central Economic Work Conference set the tone for "moderately loose monetary policy," there has been high attention in the industry. Recently, Guan Tao, the global chief economist of BOCIC, reminded that we should avoid overinterpreting moderately loose monetary policy.

"When people mention moderately loose policy, they think of the moderately loose monetary policy from the second half of 2008 to the end of 2010. At that time, in response to the impact of the global financial crisis at the end of 2008, under the framework of moderately loose monetary policy, the operations of lowering the reserve requirement ratio and interest rates were completed in just four months from September to December 2008, with significant cuts in the reserve requirement ratio and rapid interest rate reductions. However, since 2020, a prudent monetary policy has been implemented to respond to the impact of the century pandemic. Although the monetary policy stance has been supportive, the cumulative reduction in the reserve requirement ratio from the beginning of 2020 to the end of 2024 has already exceeded that of the last four months of 2008, but the extent of interest rate cuts is far less than at that time," Guan Tao said.

Therefore, after fourteen years of reintroducing "moderately loose" policy, the market has more expectations for further easing of monetary policy. However, Guan Tao believes that this time, the Central Economic Work Conference discusses monetary policy and mentions moderately loose policy, but it refers to timely reductions in the reserve requirement ratio and interest rates, rather than the substantial interest rate cuts mentioned on September 26. Moreover, when the central bank conveys the spirit of the Central Economic Work Conference and discusses interest rate policy, it emphasizes strengthening the execution and transmission of interest rate policy to promote a stable decline in the comprehensive financing costs of society.

In fact, officials from the central bank have also explained the moderately loose monetary policy. According to their introduction, interest rates need to be strengthened in execution and transmission to guide a stable decline in the comprehensive financing costs of society, and it is particularly mentioned that in the bond market, it is still necessary to observe and assess market conditions from a macro-prudential perspective, paying attention to the duration mismatch and interest rate risks for certain entities holding a large amount of medium- and long-term bonds.

Based on this, Guan Tao believes that the reintroduction of moderately loose policy at the Central Economic Work Conference at the end of 2024, after 14 years, is more a confirmation of the previous supportive stance of monetary policy. In fact, as early as June 19, 2024, at the Lujiazui Forum, Pan Gongsheng, the governor of the People's Bank of China, clearly stated, "China's situation is different from that of the West; the monetary policy stance is supportive, providing financial support for the sustained recovery and improvement of the economy." Moreover, at the press conference held by the State Council Information Office at the end of September 2024, it was clearly stated, "The People's Bank of China adheres to the fundamental purpose of financial services for the real economy, maintains a supportive monetary policy stance and policy orientation, and has implemented relatively significant monetary policy adjustments three times in February, May, and July."

"Overall, in 2025, a more proactive fiscal policy needs to be implemented, especially to expand the issuance of government bonds, which will inevitably require monetary policy to cooperate and maintain a low-interest-rate, ample liquidity environment." Guan Tao stated, but currently, the market has a tendency to rush into monetary easing, overdrawing the benefits of moderately loose monetary policy.

Guan Tao reminded that since June of last year, Pan Gongsheng has repeatedly mentioned the systemic risks accumulated from the unilateral decline of long-term interest rates in various occasions. In fact, since April, the central bank has repeatedly warned about the risks of the unilateral decline of long-term interest rates However, at present, this risk has not subsided; instead, it has further diverged.

Regarding the current situation, Guan Tao mentioned three differences compared to 2008:

First, pressure on the RMB exchange rate. Before the global financial crisis at the end of 2008, the RMB mainly faced appreciation pressure, while currently, the RMB exchange rate is in a process of continuous adjustment. Coordinating internal and external balance will impose certain constraints on monetary policy.

Second, the effectiveness of monetary policy. In 2008, it was a "two defenses" situation, so monetary policy mainly faced supply constraints, using monetary tightening to curb overheating credit demand. Now, monetary credit has shifted from supply constraints to demand constraints, to some extent, the rapid decline in long-term bond yields reflects both an asset shortage and the fact that due to insufficient effective financing demand, the central bank's monetary injection or liquidity supply cannot actually enter the real economy.

Third, systemic financial risk. Not only are banks facing this risk, but in fact, low interest rates have also put significant pressure on other long-term institutional investors (such as insurance institutions).

"From a short-term perspective, as a trading market, attention should be paid to monetary easing falling short of expectations, policy strength exceeding expectations, and economic recovery surpassing expectations, which may lead to increased turbulence in the bond market. From a long-term perspective, even if we want to create a loose financial environment for the issuance of government bonds, what kind of policy interest rate is appropriate may be a deeper theoretical issue," Guan Tao emphasized. "In the long run, China's potential economic growth rate shows a downward trend, so our neutral interest rate is declining, but theoretically, the neutral interest rate includes the inflation rate. The rapid decline in nominal interest rates is largely due to our actual economic growth rate being lower than potential output. If through supportive policies and structural reforms, the economic growth rate can return to above potential growth, then nominal interest rates may not follow the current trend. For long-term investors, how to choose allocation strategies is a greater challenge."

Author of this article: Ma Meiruo, Source: Financial Times, Original Title: "Industry Experts Interpret Moderately Loose Monetary Policy"

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