Refining Monetary Policy

by+Zhuo+Shangjin

On February 6， 2016， two days before this years Spring Festival began， the Peoples Bank of China – the countrys central bank – issued the China Monetary Policy Report for the Fourth Quarter of 2015， revealing that the nation will maintain a steady and moderately relaxed monetary policy while making appropriate fine-tuning and pre-emptive adjustment to coordinate overall demand management with supply-side reform and create a moderate monetary environment for structural reform. The report indicates that Chinas future monetary policy will feature a dynamic balance between supply-side structural reform and comprehensive demand management.

At the Central Economic Work Conference in late 2015， Chinese authorities pledged to deliver “supply-side structural reform while moderately expanding overall demand” in 2016 and beyond. When addressing a symposium on January 18， 2016， Chinese President Xi Jinping remarked that supply-side structural reform should focus on both supply and demand， give play to both the development of productive forces and the improvement of production relations， and align governmental functionality with the decisive role of the market. The monetary policy formulated by Chinas central bank for the next phase of development embodies the countrys macroeconomic policy aimed at supply-side structural reform.

Currently， China suffers an imbalance in supply and demand. This situation was largely caused by previous macroeconomic policies that separated supply and demand and overemphasized economic stimulus and demand management. Supply-side structural reform aims to solve overcapacity and oversupply in some sectors while increasing supply in other needed sectors. Essentially， it targets unleashing the decisive role of the market in resource allocation.

Formulating and implementing monetary policy is a complicated， systematic endeavor requiring both supply-side structural reform and overall demand management， which requires action in several aspects.

The first requirement is a moderate monetary and financial environment for structural reform that will promote constant and steady economic growth. As one of the nations macroeconomic regulation bodies， the central bank is responsible for achieving a dynamic balance between supply and demand and maintaining currency and price stability through monetary policy to promote steady economic development， increase employment， and balance international payments. The central bank will continue guiding commercial banks to strengthen liquidity and liability management， rationally set limits for liability and term structure， and enhance liquidity risk control.

The second aspect is structural reform aimed at reducing overcapacity， destocking， deleveraging， reducing costs and shoring up weak growth areas through deepening financial reform and innovation. In terms of destocking， China will urge its financial institutions to support supply-side structural reform of real estate， upgrade financial services that can facilitate new-type urbanization that supports migrant workers settling in cities by buying and renting houses， and abolish restrictions on housing loans in cities that have loosened purchasing restrictions. In terms of deleveraging， China may look to preferred stocks reform and reduce high debts of local governments by pushing reform of their financing mechanisms and strengthening the boundary between the government and enterprises. In terms of cost reduction， the improvement of financing structures and drop of interest rates will help enterprises cut financing costs. Statistics from the central bank show that Chinese enterprises average financing cost ratio stayed at 5.38 percent in December 2015， dropping by 169 basis points over the same period of 2014. The nation needs to enhance the role of interest rates in lowering the financing costs of enterprises and pushing the development of the real economy， and encourage financial institutions to promote green finance as well as inclusive finance.

Finally， reform and improvement of various systems and mechanisms will unleash the decisive role of the market in resource allocation as well as optimal functionality of the government. By deepening financial reform and promoting innovation， China will further hone its macroeconomic regulation model， strengthen price adjustment and conduction mechanisms， overcome obstacles hindering monetary policies from supporting the real economy， and solve major problems plaguing economic and financial operations， enhancing the operational efficiency of the financial industry and its capacity to serve the real economy.

To enable its monetary policy to conform with both supply-side structural reform and overall demand management， China needs a foothold on the present and an eye on the future. Only then will it overcome current structural contradictions and align with longterm economic trends through constantly enhancing the foresight， rationality and the effectiveness of monetary policy and financial regulation.