Phoenix TV:  

I also want to focus on monetary policy. Yesterday, the PBC cut the interest rates. How does the PBC view the possibility of a further RRR cut? Specifically, is it possible to further cut the RRR in January? Is there any room to cut interest rates in the first quarter? Thank you.

Liu Guoqiang:

Thank you for your question, I will answer it. Regarding interest rates, with the steady progress of market-based interest rates reforms, especially since the LPR reform in 2019, China has gradually improved the formation, regulation, and transmission mechanisms of market-oriented interest rates. There are two perspectives to view the state of interest rates next. One is to look at the actual changes in interest rates of loans, which means just looking at the results. Since 2021, the PBC has continued to optimize the LPR reform, improved the transmission mechanism of monetary policy, and enhanced the competitiveness of the credit market. As a result, the actual interest rates of loans have decreased while maintaining stability on the basis of a substantial decline in the previous year. Throughout 2021, the interest rates of loans for enterprises stood at 4.61%, the lowest level since the reform and opening-up more than 40 years ago.  

The other angle is to look at factors affecting interest rates or to analyze the reasons behind the changes. LPR is the market-quoted interest rate for loans that banks charge their prime customers. Factors like funding cost, market supply and demand, and risk premium may affect LPR, while the interest rate of open market operations, MLF rate, and the regulation of deposit interest rate may affect funding cost. Since 2021, the PBC has strengthened cross-cyclical adjustment, cutting down the RRR twice, in July and December, to maintain liquidity at a reasonably sufficient level. We improved self-discipline management of deposit interest rates in June, and cut interest rates for relending in the agriculture sector and small enterprises by 0.25 percentage point in December. These policies have effectively lowered funding costs for banks and driven the one-year LPR of last December down by 5 basis points. The rationale is that the reduction of funding costs for banks would lead to a decrease in interest rates for loans. On Jan. 17 this year, the PBC increased liquidity, bringing down the bid rate of both the seven-day open market operations and the one-year MLF by 10 basis points. Interest rates in the monetary market and the bond market have thus fallen. In two days, on Jan. 20, commercial banks will offer their best interest rates for loans. Sensitive to factors such as funding costs, the banks will do so by making timely references to their latest changes.

I would like to take this opportunity to make some explanations about LPR. It is a general term, and there is no LPR by industry. There are two types: one-year and five-year. Financial institutions generally refer to one-year LPR in terms of extending liquidity loans, or short-term loans, to businesses, and refer to five-year LPR in issuing medium- to long-term loans, such as loans to the manufacturing sector, fixed asset investment loans, and loans for individual home purchases, and other loans with relatively long terms, which is the bases for which their interest rates are quoted. As a macro variable, LPR does not change in an industry-specific manner. In other words, it affects all industries instead of targeting individuals, and it is a general and inclusive term, rather than being tailored for any single person, but its fluctuations affect everyone. That is why it is inclusive rather than targeting any specific industry or individual.

As for the RRR, the PBC cut it by 0.5 percentage point in July and December 2021, freeing up 2.2 trillion yuan of long-term funds. The funds improved the funding structure of financial institutions and demonstrated the financial sector's capacity to serve the real economy. After cutting the RRR, the current average RRR for financial institutions stands at 8.4%. It is no longer high compared to other developing economies or China's historical figures and leaves less room for further adjustment going forward. Yet from another point of view, there is still a certain amount of space, though it is narrower, which we can make use of in light of economic and financial performance as well as macro regulation needs. Thank you.