Innovative policy tools to ensure credit flows directly to real economy

Monetary authorities are expected to deploy more targeted measures and innovative policy tools to ensure direct credit flows to small enterprises, based on updated projections of the current domestic economic situation, analysts said on Monday.

Signals of economic recovery and moderate inflation in April and May might have driven the monetary policy toward a more flexible and targeted status, preventing large-scale stimulus that may lift financial leverages in the post-pandemic period, they said following a statement released by the central bank on Sunday.

The People's Bank of China, the central bank, said it will continually leverage the 1 trillion yuan ($141.3 billion) quota of relending and re-discounting facilities for inclusive financing, to implement the newly-created monetary tools and make sure that the credit directly reaches the real economy, said the statement.

Structural policy tools will help channel the liquidity to sectors that really need the funds, according to the statement, which also pledged to maintain liquidity at a reasonably ample level.

The policy stance was revealed after the PBOC Monetary Policy Committee held a quarterly meeting on June 24 which was chaired by PBOC Governor Yi Gang.

"Achievements have been made in epidemic control and production resumption in China, and major economic indicators have shown marginal improvements," the committee said.

"But the global pandemic and economic situations are grim and complex. The task of preventing a rebound in infections is still arduous, and poses risks and challenges to China's economic development."

The committee highlighted the need to innovate and improve macroeconomic policies, to make prudent monetary policy more flexible and appropriate. Supporting the real economy's recovery and sustainable development will be more prominent.

The monetary policy will strive to address liquidity strains and boost market sentiment, which in turn will help stabilize investment, analysts said.

Compared with the first-quarter statement issued by the monetary policy committee after its meeting, the June statement deleted the words like "control inflation" and "strengthen countercyclical measures". But it reiterated the need to increase the proportion of lending to small firms, credit loans and manufacturing loans and continue to lower lending rates via reform measures.

Wen Bin, chief analyst with China Minsheng Bank, said the changes indicated that inflation pressure is no longer a constraint on monetary policy formulation as consumer prices are likely to drop further.

The PBOC may adjust policy measures from large-scale monetary easing to more targeted tools, thanks to the improved economic indicators and the falling COVID-19 infection cases.

Some economists said aggressive monetary stimulus should be avoided as the macro leverage ratio has risen in the first quarter. Monetary policy should strike a fine balance between economic development and financial stabilization, they said.

"The central bank took very active monetary measures in the first half of this year, doing everything it can to support firms and households," Yu Yongding, an academic counselor of China Finance 40 Forum and an academic council member of the Chinese Academy of Social Sciences, said on Monday.

The major measure of the central bank is to conduct reverse repurchase operations in the open market and maintain low interest rates in the interbank money market. Another way is to reduce the rates of medium-term lending facility to guide down the benchmark lending rate－the loan prime rate.

These tools aim to support flow of credit, at lower financing costs, to spur economic growth, according to Yu, who is a former member of PBOC's Monetary Policy Committee.

"If the economic growth cannot be accelerated, the central bank may have to further ease monetary policy. And if the issuance of treasury bonds is constrained, the PBOC may have an option to conduct quantitative easing measures, just as what has been done by Japanese and US central banks. I don't think we can rule out the possibility," Yu said.