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Read in Chinese

Speakers:

Liu Guoqiang, deputy governor of the People's Bank of China (PBC)

Sun Guofeng, director general of the Monetary Policy Department at the PBC

Zou Lan, director general of the Financial Market Department at the PBC

Ruan Jianhong, director general of the Statistics and Analysis Department at the PBC

Chairperson:

Xing Huina, deputy director general of the Press Bureau of the State Council Information Office (SCIO) and SCIO spokesperson

Date: 

Jan. 18, 2022

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Xing Huina:

Friends from the media, good afternoon. Welcome to this press conference held by the State Council Information Office (SCIO). Today, we have invited Mr. Liu Guoqiang, deputy governor of the People's Bank of China (PBC), to brief you on China's financial statistics in 2021 and answer your questions. We are also joined by Mr. Sun Guofeng, director general of the Monetary Policy Department at the PBC; Mr. Zou Lan, director general of the Financial Market Department at the PBC; and Ms. Ruan Jianhong, director general of the Statistics and Analysis Department at the PBC.

Next, let's give the floor to Mr. Liu for a brief introduction.

Liu Guoqiang:

Friends from the media, good afternoon. It is a pleasure for me to attend this press conference. I will first make a brief opening introduction on the financial work in the past year and our plans for the next step.

Since the 18th National Congress of the Communist Party of China (CPC), guided by Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era, the PBC has implemented the decisions and plans of the CPC Central Committee and the State Council, followed the overall arrangement of the Financial Stability and Development Committee under the State Council, remained committed to the general principle of pursuing progress while ensuring stability, and implemented a prudent monetary policy, which have contributed to China's decisive victory in building a moderately prosperous society in all respects. In recent years in particular, monetary policy has continuously helped improve the quality and efficiency of serving the real economy and promoted China to lead globally in economic development.

In 2021, under the guidance of Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era, the PBC resolutely implemented the decisions of the CPC Central Committee and the State Council and enhanced cross-cycle adjustments in light of China's economic conditions. In the first half of the year, there were many positive factors in the operation of the domestic economy. The PBC maintained reasonable and ample liquidity, made good use of relending and two direct tools, that is, the inclusive loan repayment extension support tool and inclusive credit loans to micro and small businesses (MSBs), optimized the supervision of deposit interest rates, and raised the reserve requirement ratio (RRR) for foreign currency deposits by 2 percentage points. While guiding credit growth back to normal, efforts have also been made to optimize the credit structure and reduce financing costs. In the second half of last year, domestic economic development faced triple pressures of shrinking demand, supply shocks and weakening expectations. The PBC coordinated cross-year policies to give full play to the dual functions of monetary policy tools in terms of volume and structure. In July, the RRR was cut by 0.5 percentage point across the board, releasing 1 trillion yuan in long-term liquidity, helping to bolster the real economy and paving the way for a sustained and stable economic recovery in the second half of the year. In August, a symposium analyzing monetary and credit conditions was held to guide financial institutions to enhance the stability of total credit growth. In September, the PBC raised the quota of special central bank lending by 300 billion yuan to support locally incorporated banks to increase loans to MSBs and self-employed businesses. In November, carbon emission reduction support instruments and a special relending facility worth 200 billion yuan was launched to increase the overall energy supply capacity and promote the clean and efficient use of coal. In December, we cut the RRR by another 0.5 percentage point, releasing about 1.2 trillion yuan in long-term funds. The two RRR cuts in the middle and at the end of the year released a total of 2.2 trillion yuan in long-term funds; symposiums analyzing monetary and credit conditions of financial institutions were held to guide financial institutions to make cross-cycle credit arrangements for the end of the year and the beginning of next year; the PBC also lowered the interest rate of the relending program for the agricultural sector and small businesses by 0.25 percentage point and the one-year loan prime rate (LPR) was lowered by 0.05 percentage point, which helped the comprehensive financing costs of businesses remain stable and fall moderately; the PBC converted two direct tools into market-based policy tools to support micro and small business and support financing of micro, small and medium-sized enterprises (MSMEs); the PBC raised the RRR for foreign currency deposits of financial institutions by 2 percentage points and maintained the basic stability of the yuan exchange rate at a reasonable and balanced level. In the past year, we had a busy schedule but remained organized. Every month, we made arrangements with the clear purposes of promoting steady growth while taking into account structural optimization, in particular, in the second half of the year. 

In general, the 2021 monetary policy was flexible, accurate, proper and moderate. It was more forward-looking, stable, targeted, effective and self- directed. China's major financial indicators maintained strong growth on top of the high base of 2020. The financial system operated steadily and the financial support for the real economy was solid. In 2021, new yuan loans reached 19.95 trillion yuan, a year-on-year increase of 315 billion yuan. By the end of 2021, the M2 and aggregate financing increased by 9% and 10.3% year-on-year, respectively, basically matching the nominal economic growth rate. On the two-year average, the M2 and aggregate financing grew by 9.5% and 11.8%, respectively, which basically matched and were slightly higher than the average nominal economic growth rates in 2020 and 2021. By the end of 2021, the macro leverage ratio was 272.5%, down 7.7 percentage points from the end of the previous year, and remained basically stable. The interest rates for corporate loans in 2021 stood at 4.61%, a decrease of 0.1 percentage point from 2020 and a decrease of 0.69 percentage point from 2019, which was the lowest level since reform and opening up began. By the end of 2021, the balance of medium and long-term loans to the manufacturing sector increased by 31.8% year-on-year, 20.2 percentage points higher than the growth rate of all loans. By the end of 2021, the balance of inclusive loans to micro and small business increased by 27.3% year-on-year, benefiting more than 44 million MSBs. The weighted average interest rate of newly issued inclusive loans to MSBs in November was 4.98%, 0.1 percentage point lower than that of December 2020. 

In 2022, the PBC will implement the spirit of the Central Economic Work Conference, prioritize stability, and pursue progress while ensuring stability. We will maintain a prudent monetary policy that is flexible and appropriate, step up cross-cycle adjustment, and give full play to the dual functions of monetary policy instruments both in terms of volume and structure. We will be more proactive and enterprising, enhance our policy predictability and guide financial institutions to increase support for the real economy — especially for small and micro businesses, scientific and technological innovation, and green development, so as to ensure stable operation of the macro economy, as well as foster an appropriate monetary and financial environment for high-quality economic development

Specifically, the PBC's work will focus on the following aspects:

First, maintaining stable credit growth. We will use multiple monetary policy tools to maintain liquidity at a reasonable and ample level, ensure stable credit growth, and guide financial institutions to increase the credit supply so as to ensure the money supply and social financing expansion will basically match the nominal economic growth rate.

Second, steadily improving the credit structure. We will broaden the use of structural monetary policy instruments, implement market-based policy tools to support small and micro businesses, and make good use of the supporting tools for carbon reduction and special reloans for the clean and efficient use of coal. Financial institutions will be guided to increase the credit supply to areas where credit growth is slow and improve the credit structure. Targeted measures will be adopted to increase credit support for key areas and weak links.

Third, steadily reducing overall financing costs for enterprises. We will improve the market-based interest rate mechanism and transmission mechanism, give play to the reform of the LPR mechanism, and stabilize the costs of bank debt, so as to steadily reduce enterprises' overall financing costs and encourage the financial system to transfer profits to the real economy.

Fourth, keeping the yuan exchange rate generally stable at an appropriate and balanced level. We should let market supply and demand play a decisive role in the formation of the yuan exchange rate, and give full play to the exchange rate's role as an automatic stabilizer in adjusting the macro economy and international payments. There are many factors affecting the exchange rate. The exchange rate's uncertainty is inevitable, while its two-way fluctuations are normal. Enterprises and financial institutions should establish the concept of "risk-neutral." Financial institutions should actively provide exchange-rate risk-management services for MSMEs, in order to reduce their costs of hedging exchange-rate risks. Our goal is to keep the yuan exchange rate generally stable at an appropriate and balanced level. Although the exchange rate may deviate from the equilibrium level in the short term, market and policy factors will correct the deviation in the mid- and long-term. Thank you.

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Xing Huina:

Thanks for the introduction from Mr. Liu. Now the floor is open to questions. Please indicate the media organization you work for before raising a question.

CCTV:

My question is, in order to prioritize stability, how will the PBC implement the spirit of the Central Economic Work Conference to enhance policy predictability when exerting the role of monetary policies? Thank you.

Liu Guoqiang:

In 2021, we maintained a prudent monetary policy that was flexible, precise, reasonable and appropriate, and took initiative measures in the second half of the year. We cut the RRR by 0.5 percentage point in July, responding early to downward pressure on the economy and paving the way for sustained and steady economic recovery in the second half of 2021 and in the first quarter of 2022. The Central Economic Work Conference proposed that policy efforts should be appropriately advanced. Following the deployments of the CPC Central Committee and the State Council, the PBC launched a series of measures in December 2021, especially after the Central Economic Work Conference. We cut the RRR by 0.5 percentage point, convened a symposium on analyzing the monetary and credit situation for financial institutions, cut off 25 basis points in the interest rates of the re-lending facility supporting agricultural and small businesses, lowered the one-year LPR by 5 basis points, and transferred the "two direct tools" to market-based policy tools for supporting small and micro enterprises. One of the direct tools is the inclusive loan extension support tool. During the special period of the epidemic, we asked financial institutions to extend their loans to enterprises eligible for relative policies and simultaneously provided certain policy incentives. The other tool is the inclusive credit loan support program. At present, China has entered a new normal in economic development while epidemic prevention and control are being conducted on an ongoing basis. Therefore, the two direct tools should be transferred to market-based policy tools. In the past, the policy was based on requirement and policy incentives; whereas now, it's based on a voluntary and incentive mechanism. Financial institutions and enterprises are encouraged to communicate on their own. If the financial institution would like to extend its loans, we will provide certain policy incentives. We will step up cross-cycle adjustment to support economic growth in 2022.

Currently, the economy faces three kinds of pressure. Therefore, maintaining stability is the biggest progress. Before fundamentally easing the economic downward pressure, progress should serve stability. We will not roll out policies that aren't beneficial to stability but release policies that are conducive to stability so that progress can promote stability. Simply put, the priority goal of our current work is stability, and policy support should be redoubled. How to redouble policy support? I think efforts can be made in the following three aspects. First, ample support. The monetary policy tool kits should be further opened to maintain stable aggregates and avoid credit collapse. Second, targeted support. We should attain to the broad and great while addressing the delicate and minute. The financial sector should not only passively wait for clients at their doorsteps, but need to go out and actively look for good projects, which is an effective way of optimizing economic structures, in line with the requirements of the new development philosophy. Third, proactive support. Though it is still the beginning of the year, we should lose no time and act proactively as a year is short. We should stay ahead of the market curve, and respond to common market concerns in a timely manner. We should not procrastinate. Otherwise, market concerns will fall through and go away. If that happened, it would be a difficult situation. Therefore, we should act in advance and promptly respond to common market concerns. 

Under the strong leadership of the CPC Central Committee and the State Council, all parties are making efforts. I believe that we will also find a year quite long and the downward pressure of the economy will become a story of the past within several months. What efforts will be made?

First, maintain stable growth of the aggregate. We will use comprehensive monetary policy instruments to keep liquidity adequate at a reasonable level. Money and credit aggregates will grow at a more stable pace to ensure the increases in money supply and aggregate financing are generally in step with economic growth in nominal terms.

Second, promote steady structure improvements. We should innovate and give good play to structural monetary policy instruments and ramp up credit support for MSBs, technological innovation and green development. 

Third, promote steady decline of the financing costs for enterprises. We will continue to unleash the benefits of the LPR reform, maintain fair competition in the deposit market and stabilize bank liability costs. It is important to maintain orderly competition within the deposit market. If the competition in the deposit market is disorderly, the deposit interest rate will be very high. Low-quality banks and those that perform poorly usually find it hard to attract deposits, so they attempt to lure depositors with high deposit interest rates. Other banks will have to follow. This way, the order of the deposit market and the deposit interest rates will be misguided by those poorly-performing banks. Therefore, deposit order is crucial. Besides, if the deposit interest rate was too high, it would be hard to reduce the loan interest rate and the financing costs of enterprises. That is why we make great efforts to maintain the order of the deposit market, stabilize bank liability costs and promote a steady decline of the overall financing costs for enterprises, especially MSBs.

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The Paper.cn:

The PBC and other financial management authorities have taken some measures in response to new situations and new changes in the real estate market. What about the effects? Thank you. 

Zou Lan:

In the second half of 2021, the risks of individual real estate enterprises such as China Evergrande Group appeared. Affected by that, all kinds of real estate market entities tended to avoid risks and financial institutions demonstrated short-term stress responses. According to the arrangements of the CPC Central Committee and the State Council, the financial management departments took swift actions and carried out the following work. First, upholding law-based and market-based principles, we cooperated with the Guangdong provincial government, as well as relevant departments and local governments to defuse the risks of those enterprises. Second, we instructed financial institutions in the banking industry to get a precise understanding of, and comply with, the prudential management system of real estate financing. The banking industry should maintain an orderly and stable supply of real estate credits and meet the reasonable financing needs of the real estate market. Third, the PBC released its Notice on Financial Services for Mergers and Acquisitions of Risk Disposal Projects of Major Real Estate Enterprises to guide financial institutions to support risk dissolution and industry clearing in market-based manners. 

Through the concerted efforts of all parties, recently, real estate sales, land purchases and financing, among other areas, have gradually returned to normal. The market expectations have steadily improved. According to statistics, at the end of 2021, outstanding real estate loans nationwide were 52.2 trillion yuan, up by 7.9% year on year, a growth rate 0.3 percentage points higher than at the end of September. Specifically, new real estate loans in the fourth quarter last year hit 773.4 billion yuan, an increase of 202 billion yuan year on year, and 157.8 billion yuan over the third quarter. 

Going forward, the PBC will firmly implement the decisions and arrangements of the CPC Central Committee and the State Council, follow the principles of the Central Economic Work Conference, and act on the principle that housing is for living in, not for speculation. Following the requirements to explore a new development model, we will put in place a long-term mechanism for the real estate industry and maintain the continuity, consistency and stability of real estate financial policies. The PBC will continue to implement the prudential management system of real estate finance, ramp up financial support for rental housing and adopt city-specific policies to ensure a virtuous cycle and healthy development of the real estate sector. Thank you. 

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South China Morning Post:

The PBC on Monday unexpectedly cut the interest rates of its medium-term lending facility (MLF) loans and the open market reverse repo rate. Does this mean a new round of easing cycle is unfolding? Will it be followed by a corresponding LPR cut within the week? Meanwhile, the Federal Reserve hinted at quicker tapering and interest rate hikes. Is the PBC worried about the impacts brought by the monetary policy divergence between China and the U.S., including capital outflow or yuan depreciation? Is there any detailed arrangement for China-U.S. macro-policy coordination? Thank you.

Sun Guofeng:

This year, the PBC has strengthened cross-cyclical adjustments and stepped up liquidity injection. On Jan. 17, the PBC cut the interest rates of its one-year MLF loans and seven-day open market operations by 10 basis points, which was followed by corresponding reductions to the interest rates in the money market and the bond market. Before the new LPR was disclosed, quotation banks gave comprehensive consideration to factors such as capital costs, risk premiums and the market supply and demand, so that the LPR would promptly and fully reflect interest rate changes in the market, encourage financial institutions to lower their interest rates on loans for enterprises and promote a reduction in overall financing costs for enterprises. We have noticed the recent monetary policy adjustments by major developed economies, and the market expects that the Fed will raise interest rates and shrink its balance sheet. China's macro-economy is big and highly resilient. We have been implementing normal monetary policies since the outbreak of the pandemic. Instead of using a deluge of stimulus policies, we properly organized cross-cyclical regulation, kept liquidity reasonably ample and provided solid financial support for the real economy. China's financial system has become more stable and domestically driven. The yuan exchange rate expectations are also stable. All of this will help mitigate and respond to external risks. In general, policy adjustments by major developed economies will have a limited effect on our economy.

Next, the PBC will prioritize stability and work according to China's conditions. We will implement prudent monetary policies with the proper force and pace based on domestic situations, while increasing the yuan exchange rate's resilience to give full play to the role of the exchange rate as an automatic stabilizer capable of adjusting the macro-economy and the balance of payments. We will also encourage market entities to establish a "risk-neutral" attitude, strengthen the macro and prudent management of cross-border capital flow, better manage expectations, maintain basic stability in the yuan exchange rate, and respond to monetary policy adjustments by major developed economies in a proactive and prudent manner. Thank you.

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21st Century Business Herald:

What were the structural features of total social financing (TSF) in 2021? What's your forecast for the TSF and credit increase in 2022? Thank you.

Ruan Jianhong:

I will answer your questions. In 2021, total new social financing reached 31.35 trillion yuan, a reduction of 3.44 trillion yuan from the 2020 level and an increase of 5.68 trillion yuan from the 2019 level. The figures reflect that finance still played a big role in supporting the real economy. By the end of 2021, total outstanding social financing had risen 10.3% year on year, which is consistent with the nominal GDP growth.

In terms of the TSF structure, the first feature is that loans from financial institutions to the real economy remained stable. In 2021, loans in yuan and foreign currencies to the real economy increased by 20.11 trillion yuan, roughly in line with the 2020 level and an increase of 3.36 trillion yuan from the 2019 level.

Second, bond financing returned to normal level and stock financing saw accelerated growth. In 2021, government bond financing reached 7.02 trillion yuan, a reduction of 1.31 trillion yuan from the 2020 level. This was because the government had issued one trillion yuan of special anti-pandemic bonds in 2020, while in 2021, the bond issuance returned to normal conditions. Bond financing by non-financial companies reached 3.29 trillion yuan, down by 1.09 trillion yuan from the 2020 level. Domestic stock financing by non-financial companies reached 1.24 trillion yuan, up by 343.4 billion yuan from the 2020 level.

Third, off-balance-sheet financing declined notably. In 2021, off-balance-sheet financing, including entrusted loans, trust loans, and undiscounted bankers' acceptances, declined by 2.67 trillion yuan, 1.35 trillion yuan more than 2020's decrement.

In 2022, the PBC will fully implement the principles of the Central Economic Work Conference and maintain a prudent monetary policy that is flexible and moderate. We will also maintain reasonable and ample liquidity, and ensure that the growth of TSF is basically in keeping with GDP growth in nominal terms. Thank you.

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Economic Daily:

My question is – just yesterday, the PBC cut interest rates for reverse repo operations and MLF by 10 basis points, so I'm curious what this cut is for? And what will the effect be after lowering interest rates? Thank you. 

Sun Guofeng:

The MLF and open market reverse repurchase are carried out by market-based bidding. The winning interest rate is generated by participating bidding institutions, and the interest rate level depends on various factors such as the liquidity of the banking system, financial institutions' demand for central bank funds and market expectations. Since the beginning of this year, the PBC has implemented the spirit of the Central Economic Work Conference, strengthened cross-cycle adjustment and increased liquidity delivery. On Jan. 17, the PBC launched a 700 billion yuan one-year MLF operation and conducted 100-billion-yuan seven-day open market reverse repo operations to increase liquidity supply, and to hedge against the impact of short-term factors such as the peak of the tax period in January, accelerated issuance of government bonds and cash injection before Spring Festival, in order to maintain reasonable and sufficient liquidity. So the PBC promoted the MLF and open market reverse repurchase bid rates, which both fell by 10 basis points. Specifically, the winning bid interest rate for the one-year MLF dropped from 2.95% to 2.85%, and the winning bid rate for the seven-day open market reverse repurchase operation dropped from 2.2% to 2.1%.

These recent cuts in interest rates for the MLF and open market reverse repo operations reflect actions by the monetary policy proactively pushing things forward, which is conducive to boosting market confidence. The operations would reduce corporate loan interest rates through the LPR conductivity, facilitate the decline in bond interest rates and promote comprehensive financing costs of enterprises to be stable with a decline. This will help stimulate the financing needs of market entities, enhance the stability of total credit growth, support the issuance of government bonds and local government bonds, stabilize the broader economy and maintain a balance between internal and external equilibrium. Thank you.

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Yicai:

Recently, the financial data released by the central bank has shown a rapid decline in the growth rate of social financing. We have paid attention to the research reports issued by some securities companies, in which they believe that financing should be properly stimulated next year to resume growth. In your opinion, is the leverage ratio likely to stabilize and pick up next year? Thank you.

Liu Guoqiang:

Let me answer this question. In 2021, against the backdrop of scientific and effective pandemic prevention, remarkable results were achieved in stabilizing leverage and promoting growth. In 2021, China's macro leverage ratio was 272.5%, 7.7 percentage points lower than that at the end of 2020. If viewed from a quarterly perspective, the leverage ratio has declined for five consecutive quarters. There are both numerator and denominator factors that affect the macro leverage ratio. The numerator is the total debt, and the denominator is the gross domestic product (GDP). That is to say, the macro leverage ratio is total debt divided by GDP. In terms of the numerator, the total debt level was generally stable last year, while in terms of GDP as the denominator, it expanded significantly last year, and the growth rate is relatively fast. Especially compared with 2020, the GDP growth rate has accelerated significantly, which has a very prominent effect on reducing leverage. China's pandemic prevention and control are effective, the national economy continues to recover and development resilience continues to increase. When these factors are brought into play, GDP growth will be faster, the denominator will be larger and the macro leverage ratio will drop.

It is expected that the macro leverage ratio will remain basically stable in 2022. According to the Central Economic Work Conference, the economic work for 2022 should prioritize stability and seek progress while maintaining stability. Macroeconomic policies must be stable and effective to enhance developing the endogenous driving force. The current macro leverage ratio continues to decline, creating space for the financial system to increase support for MSBs, technological innovation and green development in the future. The decline in macro leverage over the five consecutive quarters has created room for future monetary policies, and, the lower the leverage, the greater the room. From an international perspective, China's pandemic prevention and control situation is relatively good, and economic growth is relatively resilient. It is expected that China's economic growth this year will still be faster than that of major developed economies. In this case, the denominator will remain relatively large, which will create conditions for better maintaining the macro leverage ratio in the future. We will adhere to systematic thinking, overall planning and coordination, base ourselves on serving high-quality economic development and implement cross-cycle monetary policy. Thank you.

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CNBC:

I have two questions. First, what are the favorable policies for housing purchase and loans? Second, what progress has been made in digital RMB piloting programs and research and development? For example, is there any information on the daily transactions and active users to share? What new application scenarios will digital RMB have for consumption among others? More foreigners will come to China during the Beijing 2022 Winter Olympics, and will there be any attempt to employ it then? Thank you.

Zou Lan:  

I will answer the second question first. At present, the PBC has launched pilot digital RMB programs in places including Shenzhen, Suzhou, Xiongan New Area, Chengdu, Shanghai, Hainan, Changsha, Xi'an, Qingdao, and Dalian, and built pilot scenarios for the Beijing 2022 Winter Olympics, basically covering the Yangtze River Delta, the Pearl River Delta, and Beijing-Tianjin-Hebei region as well as central, western, northeastern, and northwestern China. As of December 31, 2021, the number of digital RMB pilot scenarios had exceeded 8.0851 million, and individual wallets had totaled 261 million, with 87.565 billion yuan in transactions. The pilot programs have effectively verified the business technical design, system stability, easy use of products, and scenario applicability of digital RMB, and helped the public better understand its design concept.  

Next, the PBC will act in accordance with the 14th Five-Year Plan (2021-2025), continue to steadily pilot digital RMB R&D, and further deepen the pilot use of digital RMB in retail transactions, household payments, government services, and other scenarios. The PBC will guide the pilot R&D of digital RMB to serve the real economy and people's lives so as to make more enterprises and individuals recognize the value of digital RMB and fully stimulate the enthusiasm of industrial players.  

Your first question is about the housing purchase policy. Being region-based is one of the core features of the real estate. Under the management framework of long-term real estate mechanisms, it is more important for municipal governments to assume their responsibilities and conduct city-specific real estate regulations based on the local markets. Therefore, you can ask the municipal governments for more information about the home purchase policy. As for the home loans policy, as I said before, we will still act on the principle that houses are for living in, not for speculation, and maintain basic stability in line with the long-term mechanism. We will stabilize land prices, housing prices and expectations – the priority of stabilizing expectations is to keep policy expectations steady. Indeed, as I mentioned before, various parties, especially some financial institutions, reacted to market changes based on their judgment of market trends and risk evolution in the second half of last year. As a result, since September last year, the PBC has, along with other financial management departments, strengthened communication with related financial institutions to help them accurately understand and assess market situations and better implement prudent financial regulation of the real estate so as to meet the reasonable financing needs of the real estate market. Thank you.  

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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.

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Bloomberg:

I have two questions. My first question is, what will be the impact of divergence in interest rates between the U.S. and China, as the federal reserve starts to rise? Will monetary policy divergence have an effect on the exchange rate and how will you deal with that? My second question is, do you think corporate borrowing demand is weak based on the December data? We saw a lot of very short-term loans being made between banks and banks making very short-term loans to companies. Do you think the company loan demand is fundamentally weak? Thank you.

Sun Guofeng:

Let me take these two questions. Regarding your first question, China adopts a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies. Future yuan exchange rates are subject to many factors, including market supply and demand and international market trends, with the former playing a decisive role in forming the exchange rate. Fluctuations in the exchange rate are mainly determined by the market and make the yuan either appreciate or depreciate. With its enhanced elasticity and two-way fluctuations, the yuan exchange rate serves as an automatic stabilizer of the macro-economy and the international balance of payment and contributes to the balance between the internal and external equilibrium. Cross-border flows of funds may fluctuate to some extent with changes in the international financial market, but China's super-large economy sustains a sound domestic economy, which provides a good foundation for maintaining the internal and external equilibrium.

Generally, cross-border financial flows would maintain a dynamic equilibrium. Next, the PBC will prioritize stability and pursue a prudent monetary policy that is flexible and modest. We will place our situation at the center, and give play to the role of yuan exchange rates adjusting the macroeconomy and acting as the automatic stabilizer for international payment balance. We will strengthen macro-prudential management of the cross-border flow of capital, intensify expectation management, guide enterprises and financial institutions in cultivating a "risk-neutral" concept, balance the domestic and international equilibrium and keep the yuan exchange rates basically stable at a reasonable and balanced level. 

Now I rely to the second question. Since 2021, we have adopted a prudent monetary policy that is flexible, precisely-targeted, reasonable and modest. In the face of downward pressure from contracted demands, supply shock and diminished expectations, the PBC – beginning in the second half of 2021 – has enacted forward-looking measures including cutting the RRR, increasing the reloan quota for small financial institutions, rolling out supportive tools for carbon reduction and offering reloans to promote clean and efficient use of coal, so as to intensify the financial support for real economy. Since December, in line with the arrangements of the Central Economic Work Conference, the PBC has further intensified cross-cycle adjustments to ensure the policy cohesion between two years. We have cut the RRR by 0.5 percentage points again and guided financial institutions in increasing the stability of growth in the volume of loans. The PBC has lowered its one-year LPR by five basis points, and actively leveraged structural monetary policy tools to do a good job of "addition," and carried out the extension and transformation of two direct tools. These measures have been beneficial to the stabilization of the credit supply and the optimization of the credit structure in 2021 and ensuring a steady start in 2022. The volume of new loans stood at 19.95 trillion yuan in 2021, up 315 billion yuan year-on-year. This was a further growth considering that the volume of new loans had increased by 2.8 trillion yuan year-on-year from 2019 to 2020 and this showed that the financial support for real economy has continued to intensify. The volume of loans had increased significantly from 2019 to 2020 on a year-on-year basis, so the increase in 2021 was a further growth from that. In December 2021, new loans of the month reached 1.13 trillion yuan, rising slightly on a year-on-year basis, mainly due to the fact that financial institutions had expanded their credit supplies to fight against COVID-19 in 2020 and thus created a relatively high base. Historically, the amount of loans in December is often small, and the average volume of new loans was less than 1 trillion yuan in December from 2016 to 2019. So, the loans in December 2021 still increased compared with the years before the outbreak of COVID-19, showing the results achieved by introducing relevant policies at an early stage. Since the beginning of this year, the PBC has strengthened cross-cycle adjustment, increased liquidity, lowered the median interest rate by 10 basis points for the MLF and open market operations, helping spur financing needs of market entities and increase the stability of credit growth. 

Next, the PBC will prioritize stability and pursue a prudent monetary policy that is flexible and modest. We will increase the intensity of cross-cycle adjustments, better play monetary policies' role in volume and structure regulation, maintain reasonably adequate liquidity and guide financial institutions in effectively increasing credit availability. With the effects of a variety of policies adopted by the PBC emerging and accumulating, financial institutions will increase loans to the real economy. Growth of credit supplies will be more stable, while more credit resources will be channeled to key areas and weak links such as small and micro enterprises, scientific and technological innovation, and green development, among others, so as to ensure that money supply and social financing are generally in step with the economic growth in nominal terms. Thank you!

Ruan Jianhong:

I will add some data for the second question. The amount of outstanding domestic and foreign currency loans to enterprises and institutions increased 11 percent at the end of last year, 1.4 percentage points lower than the previous year, but 0.5 percentage points higher than in 2019. The amount of new loans to enterprises and institutions added 12.14 trillion yuan for the whole year and was roughly the same as the previous year. The amount of medium and long-term loans added 9.24 trillion yuan, up 464.2 billion yuan year-on-year. 

In terms of the actual flow of medium- and long-term loans, the scale of support provided by financial institutions to key sectors is still consistent and stable, which is reflected in the following aspects:

First, the manufacturing industry's medium- and long-term loans maintained rapid growth. As of the end of 2021, the manufacturing industry's medium- and long-term loans grew 31.8%, 18.1 percentage points higher than the growth rate of such loans for all industries. In 2021, loans for the manufacturing industry increased by 1.67 trillion yuan, 300.5 billion yuan more than the previous year. Specifically, the growth rate of medium- and long-term loans for the high-tech manufacturing industry was 32.8% in 2021, 364.3 billion yuan more than the previous year.

Second, the industrial sector's medium- and long-term loans saw a relatively high growth rate. As of the end of 2021, the industrial sector's medium- and long-term loans increased 22.6%, 2.6 percentage points higher than the previous year's end. The sector saw 2.49 trillion more medium- and long-term loans in 2021, increasing 650.3 billion yuan year-on-year.

Third, the infrastructure sector's medium- and long-term loans sustained a steady and robust growth rate. As of the end of 2021, this growth rate was 15.3%, 1.1 percentage points higher than the previous year's end. A total of 3.82 trillion yuan of medium- and long-term loans was added to the infrastructure sector in 2021, increasing 734.6 billion yuan year-on-year.

Fourth, the service industry's medium- and long-term loans, excluding the real estate sector, have kept growing fast. Its growth rate reached 15.4% as of the end of 2021, 1.7 percentage points higher than the growth rate of such loans for all industries. A total of 5 trillion yuan of medium- and long-term loans was added to this industry in 2021, 261.8 billion yuan more than the previous year. Thank you.

Liu Guoqiang:

Regarding the first question on the exchange rate, I would like to make a few more points for your reference. Observing the trend of the exchange rate is getting tougher and tougher nowadays. In the past, the exchange rate fluctuations between the yuan and the U.S. dollar were rather regular, as they sat on the opposite ends of a seesaw. This meant that when the U.S. dollar appreciated, the yuan would be devalued relatively. Still, there were several cases in 2021 when the U.S. dollars appreciated while the yuan showed a stronger trend. This seems unreasonable and makes short-term observation even more difficult. However, it can still make sense. For instance, China's economy posted fast growth last year with a relatively high trade surplus, and the expectations for China's economy were rather promising at the early stage. Therefore, the yuan appreciated, which led to a situation where the U.S. dollar appreciated while the yuan got even stronger. Nevertheless, if we look at the longer span of time, the situation will make more sense, and the fluctuations are still reasonable, balanced, and reciprocal. Thus, the exchange rate fluctuations remain consistent and stable, and relevant rules haven't changed in the long run, only that the calculation and forecast in the short term have become difficult. 

In addition, China is one of the major countries in the world. A continued unilateral appreciation or devaluation rarely occurs in big countries, and it will never happen in China. This is due to our sound macro regulation. Instead of flooding China's economy with liquidity, we have been following economic rules, and our micro-market mechanism proves to be effective. As a result, although there may be some interferences, the exchange rate fluctuations between the yuan and the U.S. dollar are generally reasonable, balanced, and stable on the whole. Thank you.

Xing Huina:

Thank you to today's speakers for their professional and detailed response and introduction. Today's press conference is at this moment concluded. Thank you to all our friends from the media.

Translated and edited by Lin Liyao, Wang Wei, Li Xiao, Li Huiru, Zhang Rui, Liu Qiang, Zhang Tingting, Liu Sitong, Zhu Bochen, Wang Yiming, He Shan, Xu Xiaoxuan, Zhang Jiaqi, Wang Qian, Yuan Fang, Liu Jianing, David Ball, Jay Birbeck, Drew Pittock and Tom Arnstein. In case of any discrepancy between the English and Chinese texts, the Chinese version is deemed to prevail.