Home » Business » Finance Special
Initiative to boost efficiency of monetary policy
Print Edition
THE policy announcement came after the regular State Council meeting on November 19 when Premier Li Keqiang proposed 10 measures to address issues with elevated funding cost for corporate. As we have discussed in our recent reports, the key task for the government in the second half has been to effectively lowering corporate financing cost.
Monetary policy transmission so far has begun to be more evident in the bond market and corporate direct financing, however, financing conditions for corporate borrowers, particularly small and medium-sized enterprises has not improved materially, this is largely due to a lack of market-based funding channel and banks’ credit risk control. As such, we believe the policy announcement confirms that the central bank is committed to alleviating corporate funding difficulties and to tackling structural issues with accelerating interest rate reforms.
The above measures on interest rate reforms and the timing of the widening of the deposit rate ceiling are in line with the roadmap of interest rate reforms that we envisioned, and combining deposit rate cuts with the ceiling widening is also in line with our policy outlook. However the simplification of the policy rate term structure came as a surprise to us as it takes place about six months earlier than our prior forecast (in the middle of 2015).
We continue to expect China to establish a deposit insurance scheme before the end of this year. We believe the above measures will pave the way for the People’s Bank of China to eventually abolish the policy deposit rate curve and policy lending rate curve which we expect in late 2015. By then, the prime rate curve will develop into a marketbased lending rates curve, and the policy deposit rate curve will be replaced with a short term policy rate target, either the overnight rate or the seven-day rate.
Open market operations
This rate would be the uncollateralized funding rate between financial institutions, similarly to the Fed fund target rate, and it would be likely to come from the SHIBOR market. The central bank could then actively engage in more frequent intraday open market operations to keep this short-dated SHIBOR rate close to its target.
The introduction of a short-term monetary policy rate could form the basis of a new monetary policy framework for China. We envision the new monetary policy framework will significantly improve monetary policy transmission in the domestic financial market (from the money market, the bond market and the bank loan market) which improves the efficient capital allocation in the aggregate economy.
Although the cost of capital in the economy would in such a scenario be increasingly market-oriented, we think keeping a quantitative target would remain critical to China’s monetary policy framework especially in maintaining medium to long term monetary price stability.
In the foreseeable future, we believe China’s monetary policy will rely on a short-term monetary policy rate as the operating target to maintain price stability in the short-term, while at the same time using a broader monetary aggregate measure, the M3, as the quantitative target to manage medium to longer term balances between money aggregate and prices. We envision such a new framework as being similar to European Central Bank’s two-pillar approach of monetary policy and China is likely to complete its interest rate liberalization reform towards the end of 2016.
- About Us
- |
- Terms of Use
- |
-
RSS - |
- Privacy Policy
- |
- Contact Us
- |
- Shanghai Call Center: 962288
- |
- Tip-off hotline: 52920043
- 沪ICP证：沪ICP备05050403号-1
- |
- 互联网新闻信息服务许可证：31120180004
- |
- 网络视听许可证：0909346
- |
- 广播电视节目制作许可证：沪字第354号
- |
- 增值电信业务经营许可证：沪B2-20120012
Copyright © 1999- Shanghai Daily. All rights reserved.Preferably viewed with Internet Explorer 8 or newer browsers.
