China Will Maintain ‘Normal’ Monetary Policy, PBOC Official Says

China’s central bank said it will maintain a “normal,” “steady” and “flexible” monetary policy in response to increasing economic uncertainties amid the Covid-19 pandemic.

“To cope with all sorts of uncertainties, monetary policy requires greater certainty,” Sun Guofeng, head of the monetary policy department at the People’s Bank of China, said Tuesday at a press conference. At the same time, the central banker projected lower interest rates for businesses.

China has not adopted zero or negative interest rates or other unusual policies such as quantitative easing, so there will be no so-called exiting problem, Sun said. The central bank pledged to keep flexible and appropriate operations, neither leaving the market with a lack of money nor fostering too much liquidity. In the next stage, the monetary policy should be more flexible, appropriate and precise, Sun said.

Specifically, a variety of monetary policy tools will be used to ensure that liquidity is reasonably ample, to maintain a reasonable growth of money supply and social financing and to support the economy’s return to its potential growth rate, the central banker said.

Structurally, the central bank will guide new credit to the manufacturing sector and to small and micro businesses, promote the reduction of financing costs, and ensure that the expected target of reducing the burden on market participants by 1.5 trillion yuan ($217 billion) will be achieved, Sun said.

In July, corporate lending rates fell by 0.64 of a percentage point year on year, data from the PBOC showed.

“With the further release of the potential of the loan prime rate (LPR) reforms, corporate lending rates are expected to fall further,” Sun said. Last summer, the PBOC pushed out LPR changes by establishing a reference rate for new loans issued by banks to help steer corporate borrowing costs lower.

The LPR, originally introduced in 2013, is an interest rate that commercial banks charge their best clients and is intended to better reflect market demand for funds than the benchmark the PBOC sets. The new LPR will be linked to the PBOC’s medium-term lending facility (MLF), which is determined by broader financial system demand for central bank liquidity.

One year since the LPR revisions were launched, remarkable results have been achieved, PBOC deputy governor Liu Guoqiang said at the press conference. The one-year LPR is currently at 3.85%, down 0.4 of a percentage point from before the changes.

Liu said the LPR overhaul also promoted deposit interest rate liberalization. Recently, deposit interest rates of all maturities declined, among which medium- and long-term deposit interest rates dropped more sharply.

Contact reporter Denise Jia (huijuanjia@caixin.com) and editor Bob Simison (bobsimison@caixin.com)

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