By Wei Hongxu
Recently, the People’s Bank of China (PBoC) disclosed the use of structural monetary policy tools. According to central bank data, as of June 30, the balance of PBoC’s structural monetary policy tools was RMB 6.87 trillion, with an increase of RMB 518 billion compared to the end of the first quarter.
This growth rate marks the lowest increase in four quarters. In recent years, the PBoC has been actively promoting both structural and quantitative policies, and increasingly utilizing structural policies as the main tool for monetary policy adjustments. To address economic structural transformation and ensure stable growth, the Chinese central bank has not only introduced new structural tools but also increased the quotas of some traditional ones. However, the RMB 518 billion increase in the second quarter of this year is a significant decline compared to the net increases of RMB 1.484 trillion, RMB 9.004 trillion, and RMB 3.754 trillion in the third quarter of last year, the fourth quarter of last year, and the first quarter of this year, respectively. This indicates that the structural monetary policy is facing challenges.
Against the backdrop of the slowdown in China’s economic growth, the sharp reduction in the increment of structural policies is a cause for concern. On one hand, the policies have not played a significant role in stabilizing economic growth, and the growth of social financing relies more on expansion in traditional sectors. This has raised concerns in the market about the insufficient financing demand for newly supported economic drivers, implying that the internal driving force of the economy is insufficient. On the other hand, it also reflects that the monetary policy maintains a prudent approach. Even with structural policies, unlike last year’s substantial expansion phase, the current approach exhibits limited elasticity in both expansion and contraction, similar to overall monetary policies. In such a situation, the effectiveness of the monetary policy will be compromised.
In the first-quarter monetary policy report, the PBoC previously emphasized that structural monetary policy tools should adhere to a focus on key areas, reasonable moderation, and the principle of appropriate expansion and contraction. This to some extent hinted at a narrowing of the increment in structural policies in the second quarter. The bank’s officials have also indicated that most structural tools are temporary instruments with clear implementation periods. At the end of the implementation period, if the main contradictions in economic operations have changed, or if the willingness and ability of commercial banks to provide services have significantly improved, and the policy objectives of the structural tools have been achieved, they will be promptly and timely phased out.
According to general understanding, the implementation of phase-specific structural policies by the central bank typically requires 3 to 5 years. This means that some policy tools introduced during the COVID-19 pandemic may face consolidation and withdrawal, leading to a slowdown in the overall growth of structural policy tools. As indicated by PBoC’s data, five policy tools, i.e., technology innovation rediscount loans, transportation and logistics targeted rediscount loans, equipment upgrading and renovation targeted rediscount loans, preferential interest rate support for inclusive small and micro-loans, and toll road loan support tools, have reached their “expiration” status. This means that these tools will not be extended, and their gradual expiration will result in an overall reduction in the size of structural policy tools.
Of note is that some policy tools that were supposed to be effective are facing underutilization. For example, the “guaranteed handover building” loan financing tool, which has an allocated amount of RMB 200 billion, had only utilized RMB 5 billion by the end of the second quarter. Similarly, the first-quarter newly established special rediscount loans for real estate enterprises and rental housing loan support plan, with a total amount of RMB 180 billion, have not been substantially disbursed. The outstanding quota of RMB 50 billion for financing support for private enterprise bonds during the period also faces a situation of “zero disbursements”. The Pledged Supplementary Lending (PSL) program, which was previously used to support shantytown renovation policies, saw its balance decrease by RMB 139.5 billion by the end of June, mainly due to policy banks repaying outstanding loans. The contraction or “zero demand” for these property-related policy tools is a result of, on one hand, the sluggishness of the real estate market, making it difficult for new investments to take place, and on the other hand, the limited number of enterprises and financial institutions that meet the requirements for relevant loans, thereby weakening the operability and adaptability of these tools. Despite the significant financing needs of some problematic real estate companies and ” guaranteed handover” projects, the high risk of relevant credit assets has not only discouraged commercial banks from participating but also put the related policy tools in an awkward situation of little actual results being produced.
In the current state of the economic downturn, many market institutions anticipate that macroeconomic policies in China will further strengthen in the second half of the year. Under such circumstances, structural monetary policies will inevitably need to be adjusted and expanded. Some policy tools introduced during the pandemic may gradually phase out, and other policy tools that do not meet market needs will require adjustments. Overall, during the second quarter of the PBoCs monetary policy meeting, the expression regarding structural monetary policies was changed by removing the content that stated “structural monetary policy tools should adhere to a focus on key areas, be reasonably moderate, and have both expansion and contraction”. This indicates that the overall quantity of structural policy tools will be expanded. Additionally, as the PBoC previously stated, some long-term support measures, such as loans for small and medium-sized enterprises, will be further increased.
Currently, long-term structural tools still face challenges on the demand side, as some of them are not fully utilized up to their existing quotas. This may not be due to monetary policy, but rather due to factors such as lack of market confidence, insufficient credit demand, and inadequate motivation of financial institutions. In this context, it becomes difficult to expand structural policies in the second half of the year. Therefore, according to the researchers at ANBOUND, more policy adjustments need to be made beyond monetary policy. Insufficient demand cannot be solely addressed by monetary policy, as it requires further streamlining of the monetary transmission mechanism and financial system reforms. Otherwise, regardless of the inclusion of structural and overall policy tools, more financial resources will still face the situation of not meeting the real economy’s needs.
Final analysis conclusion:
In the second quarter, the total volume of the People’s Bank of China’s structural policy tools increased by only RMB 51.4 billion, which represents a significant narrowing compared to the previous quarters since the second half of last year. This reflects that the effectiveness and impact of the central bank’s structural policy tools are encountering bottlenecks. With the increasing demand for policy support in the second half of the year, structural monetary policy itself also faces the need for adjustments and reflections. To achieve stable economic growth, it will require reforms that go beyond macroeconomic policies to unleash demand.
Wei Hongxu is a researcher at ANBOUND