The central bank: Maintaining the basic stability of the RMB exchange rate at a reasonable and balanced level, resolutely guarding against the risk of exchange rate overshooting.

According to Dolphin Research, the People's Bank of China has released the Q2 2023 China Monetary Policy Implementation Report on its website. In the next phase, the central bank will adhere to the principle of seeking progress while maintaining stability, fully implement the new development concept in a comprehensive, accurate, and thorough manner, accelerate the establishment of a new development pattern, deepen reform and opening-up in an all-round way, integrate the implementation of the strategy to expand domestic demand with the deepening of supply-side structural reforms, increase the intensity of macroeconomic policy regulation, establish a modern central bank system, fully leverage the effectiveness of monetary credit, continuously promote sustained improvement in economic performance, continuous enhancement of endogenous growth momentum, continuous improvement in social expectations, and continuous resolution of hidden risks, and promote both qualitative and quantitative improvement in the economy. In response to significant changes in the supply-demand relationship in the real estate market, timely adjustments and optimizations will be made to real estate policies to promote stable and healthy development of the real estate market. The positive role of finance in promoting consumption, stabilizing investment, and expanding domestic demand will be fully utilized to maintain basic price stability. The central bank will adhere to a managed floating exchange rate regime based on market supply and demand, with reference to a basket of currencies, and adopt comprehensive measures to stabilize expectations and maintain the renminbi exchange rate at a reasonable and balanced level, while resolutely guarding against the risk of exchange rate overshooting. Efforts will be made to prevent and resolve financial risks in key areas, coordinate and coordinate financial support for the resolution of local government debt risks, steadily promote the reform and risk reduction of small and medium-sized financial institutions, and ensure that no systemic financial risks occur.

In addition, the Q2 2023 China Monetary Policy Implementation Report also points out that in the next phase, efforts will be made to deepen the market-oriented reform of interest rates and exchange rates, with a focus on maintaining internal and external balance. The market-oriented reform of interest rates will continue to be deepened, the policy interest rate system of the central bank will be improved, the market-oriented interest rate formation and transmission mechanism will be improved, the effectiveness of the reform of the loan market quoted interest rate and the market-oriented adjustment mechanism for deposit interest rates will be continuously exerted, and multiple measures will be taken to promote the stability and moderate reduction of comprehensive financing costs for enterprises and resident credit. Steady progress will be made in the market-oriented reform of the exchange rate, the market-based, managed floating exchange rate regime based on market supply and demand and with reference to a basket of currencies will be improved, the decisive role of the market in exchange rate formation will be adhered to, and the exchange rate will play a role in regulating the macroeconomy and stabilizing international balance of payments. Expectation management will be strengthened, bottom-line thinking will be adhered to, monitoring, analysis, and risk prevention of cross-border capital flows will be done well, and when necessary, counter-cyclical and unilateral behaviors in the market will be corrected, resolutely guarding against the risk of exchange rate overshooting, and maintaining the renminbi exchange rate at a reasonable and balanced level.

The key points of the content are as follows:

Since the beginning of this year, under the strong leadership of the Party Central Committee with Comrade Xi Jinping at the core, China's economy has continued to recover and overall improve. In the first half of the year, the gross domestic product (GDP) grew by 5.5% year-on-year, laying a solid foundation for achieving the annual economic and social development goals; the consumer price index (CPI) rose by 0.7% year-on-year, and overall prices remained stable. The People's Bank of China adheres to the guidance of Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era, resolutely implements the decisions and arrangements of the Party Central Committee and the State Council, adheres to the principle of stability, seeks progress, and implements a prudent and powerful monetary policy to promote overall improvement in economic performance.

First, it maintains a reasonable growth of monetary credit. By comprehensively using reserve requirement ratio cuts, re-lending and rediscounting, medium-term lending facilities, open market operations, and other means to inject liquidity, the central bank ensures that liquidity is reasonably abundant, guides financial institutions to provide stable credit support to the real economy, and enhances the stability and sustainability of loan growth. Second, it is necessary to promote the stable and moderate reduction of financing costs for the real economy. By utilizing the guiding role of policy interest rates, the bid rates for open market reverse repurchase operations in June and August, as well as the rates for medium-term lending facilities, were reduced by a total of 20 and 25 basis points respectively. This effectively facilitated the reform of the loan market quotation rate (LPR) and contributed to the stabilization and reduction of financing costs for enterprises and residents. The important role of the market-oriented adjustment mechanism for deposit rates should be fully utilized. The dynamic adjustment mechanism for first-home mortgage rates should continue to be implemented.

Third, the role of structural policy tools should be continuously strengthened. In addition to making good use of existing structural policy tools, various phased tools such as increased re-lending and rediscount quotas for supporting agriculture and small businesses, as well as the continued implementation of inclusive small and micro enterprise loan support tools, should be introduced. The application period for the relevant policies of the "16 Financial Measures" for real estate should be extended, and special re-lending and leasing housing loan support plans for real estate enterprises should be implemented.

Fourth, both internal and external balance should be taken into account. The market-oriented reform of the exchange rate should be deepened, and the decisive role of the market in the formation of the RMB exchange rate should be upheld. The exchange rate should serve as a macroeconomic and international balance stabilizer.

Fifth, risk prevention and resolution should be strengthened. Risks should be disposed of in accordance with the principles of marketization and rule of law. A framework for hierarchical and segmented monitoring, early warning, and hard constraints on bank risks should be established. The bottom line of preventing systemic financial risks should be firmly maintained.

Overall, the monetary policy has been forward-looking, effective, and sustainable this year. The pace and intensity have been reasonably adjusted according to changes in the situation, creating a favorable monetary and financial environment for the economic recovery. Monetary credit has maintained reasonable growth, with RMB loans increasing by 15.7 trillion yuan in the first half of the year, an increase of 2.0 trillion yuan compared to the same period last year. At the end of June, RMB loans, broad money supply (M2), and social financing scale increased by 11.3%, 11.3%, and 9.0% respectively compared to the same period last year. The structure of credit has continued to improve, with inclusive small and micro enterprise loans and medium- to long-term loans for the manufacturing industry increasing by 26.1% and 40.3% respectively compared to the same period last year. Loan interest rates have significantly declined, with the weighted average interest rates for new corporate loans and individual housing loans in June at 3.95% and 4.11% respectively, which were 0.21 and 0.51 percentage points lower than the same period last year, reaching a historical low. The RMB exchange rate has fluctuated in both directions, with the RMB depreciating below 7 against the US dollar in May and appreciating by 1.3% in July. The structure of foreign exchange purchases and sales has been rational and orderly, and market expectations have remained stable.

At present, China's economy has returned to normal operation, and high-quality development is being solidly promoted. However, it should be noted that the international political and economic situation is complex and severe, and the cumulative effects of rapid interest rate hikes in developed economies continue to emerge. The momentum of global economic recovery has weakened, and the domestic economy faces challenges such as insufficient demand, operational difficulties for some enterprises, and multiple risks in key areas. China's economy has tremendous resilience and potential, and the long-term positive fundamentals have not changed. Favorable conditions and positive factors continue to accumulate, and strategic confidence should be maintained. In the next stage, the People's Bank of China will adhere to the guidance of Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era, fully implement the spirit of the 19th National Congress of the Communist Party of China and the Central Economic Work Conference, adhere to the general principle of seeking progress while maintaining stability, comprehensively implement the new development concept in a complete, accurate, and comprehensive manner, accelerate the construction of a new development pattern, comprehensively deepen reform and opening up, integrate the implementation of the strategy to expand domestic demand with the deepening of supply-side structural reform, increase the intensity of macroeconomic policy regulation, build a modern central bank system, fully leverage the effectiveness of monetary credit, and continuously promote the sustained improvement of economic operation. Continuous enhancement of endogenous driving forces, continuous improvement of social expectations, and continuous resolution of risks and hazards have promoted the qualitative and rational growth of the economy.

A prudent monetary policy should be precise and powerful, better exerting the dual functions of total and structural monetary policy tools, and stably supporting the recovery and development of the real economy. Comprehensive use of various monetary policy tools to maintain reasonable and abundant liquidity, and ensure that the growth rate of money supply and social financing scale matches the nominal economic growth rate. Continue to deepen the market-oriented interest rate reform, improve the central bank's policy interest rate system, continue to play an important role in the reform of the loan market quoted interest rate and the adjustment mechanism of deposit rate marketization, and promote the stability and moderate reduction of corporate financing and household credit costs. Structural monetary policy tools should "focus on key areas, be reasonable and moderate, and have both advances and retreats." Continue to implement existing tools, continue to implement them in areas with prominent structural contradictions, and continue to increase support for small and micro enterprises, technological innovation, green development, and other areas. Adapt to the new situation where the supply and demand relationship in the real estate market has undergone significant changes, timely adjust and optimize real estate policies, and promote the stable and healthy development of the real estate market. Give full play to the positive role of finance in promoting consumption, stabilizing investment, and expanding domestic demand, and maintain a basically stable price level. Adhere to the market supply and demand as the basis, refer to a basket of currencies for adjustment, and implement a managed floating exchange rate system. Take comprehensive measures, stabilize expectations, and maintain the basic stability of the RMB exchange rate at a reasonable and balanced level, and resolutely guard against the risk of exchange rate overshooting. Effectively prevent and resolve financial risks in key areas, coordinate and coordinate financial support for the resolution of local government debt risks, steadily promote the reform and risk reduction of small and medium-sized financial institutions, and ensure that no systemic financial risks occur.

This article is selected from the "Central Bank's official website", edited by Zhang Jinliang from Zhitong Finance.