ThePaper.cn:
How should we understand the need for "prudent monetary policy" to be flexible, accurate, reasonable and moderate? And, how should we view the follow-on measures of reducing reserve requirement ratio and interest rates? Thank you.
Chen Yulu:
Sun Guofeng, director general of the Monetary Policy Department of the People's Bank of China, will answer your questions.
Sun Guofeng:
China's economy is back on the right track with a stronger internal driving force and better economic indicators. Due to the COVID-19 pandemic and uncertainties in the external environment, the global economic and financial situation is still complicated and the foundation of economic recovery is still unstable. Our monetary policy should support the real economy while striking a balance between economic recovery and risk prevention. Therefore, China will prioritize stability in its monetary policy in 2021. A prudent monetary policy should be flexible, precise, reasonable, moderate, and sustainable.
China will use a comprehensive range of monetary policy tools, such as reserving requirement ratio, re-lending, and re-discount, medium-term lending facility, and open market operations to maintain liquidity at a reasonably ample level, ensure that the growth of the broad money supply and social financing basically matches nominal economic growth, and make flexible policy adjustments in accordance with changes in the situation.
China will give full play to the "drip irrigation" function of monetary policy tools and step up efforts to effectively support the real economy. On one hand, we will prudently adjust and carry on the emergency policies like the two recent monetary policy tools that aim to boost the real economy. On the other hand, we will innovate and implement new monetary policy tools to provide financial support to scientific innovations, small and micro-sized businesses, and green development.
We will deepen reform of the financial system, continue to promote liberalization of interest and exchange rates, improve the transmission mechanism of monetary policy, and establish a market-based interest rate system. We also aim to promote the steady decline of comprehensive financing costs, deepen LPR reform, maintain a lowered interest rate on loans, improve the flexibility of RMB exchange rate, strengthen the macro and prudent management of cross-border capital flow, stabilize market expectations, establish a "risk-neutral" attitude among businesses and financial organizations, and maintain basic stability in the RMB exchange rate.
You asked a question about the reserve ratio and interest rate. About the interest rate, we should pay more attention to the changes in the real interest rate. Since 2020, the People's Bank of China has adopted reform measures to reduce financing costs for companies, which has proved quite effective.
China's corporate lending rate was 4.61% in December 2020, down 0.51 percentage points year on year, an all-time low and a larger drop than LPR. Furthermore, declining loan interest rates pushed banks to reduce the cost of debt, forcing saving rates to drop. The three-year and five-year weighted average deposit interest rates have dropped to 3.67% and 3.9% respectively, down five and 16 basis points year on year. The current economy has returned to a potential output level, with a strong demand for business loans and a reasonable growth in currency credit, indicating that the current interest rate level is appropriate.
Regarding the reserve requirement ratio, the People's Bank of China lowered the ratio three times in 2020, releasing 1.75 trillion yuan in liquidity. Since 2018, the People's Bank of China has altogether cut the reserve ratio 10 times, releasing a total of 8 trillion yuan in liquidity. Now, the average reserve ratio for all Chinese financial institutions is 9.4%, while for over 4,000 medium- and small-sized financial institutions, the ratio is 6%. Whether compared with other developing countries or compared with China's historical reserve ratio, the current deposit reserve ratio is not high.
Next, the People's Bank of China will adopt a comprehensive range of monetary policy tools to provide short, medium, and long-term liquidity in accordance with the changes in economic and financial situations, maintain liquidity at a reasonably ample level, and ensure that the growth of broad money supply and social financing basically matches nominal economic growth. We will continuously deepen our reform toward a more market-oriented interest rate, maintain the lowered real interest rate in loans, promote the steady decline in corporate financing costs, and provide a sound monetary policy environment for high-quality economic development. Thank you.
