Keystone

On April 26th, the people's Bank of China said it would increase two new re-loans to support the development and use of coal and the enhancement of energy storage and civil aviation. The creation of re-lending instruments has become the starting point of the current monetary policy.

What is a structured monetary policy tool?Structural monetary policy instruments refer to re-loan rediscount tools, which mainly include existing rediscount, reloans for small-scale agriculture, carbon emission reduction support tools and technological innovation re-loans in the process of creation, inclusive pension special re-loans, logistics industry re-loans and civil aviation special re-loans, and so on. The preferential interest rate, distribution object and usage amount of each tool are different. The central bank will set the relevant details according to the characteristics of each industry, and all adopt the mechanism of "lending first and then borrowing". The principle of structured monetary policy instruments is that commercial banks provide credit to specific industries and obtain low-cost reserve "reimbursement" in accordance with the requirements of the central bank, which is very attractive to small banks.

How to understand its creation logic? Key areas of the national economy + relief.We understand that the main role of structured monetary policy instruments is to guide the flow of financial resources to key areas and weak links of national economic development. The recent domestic epidemic has added another layer of logic to the structural monetary policy tool: bail-outs. The use of structural tools can provide targeted support to industries and enterprises severely affected by the epidemic. Since April, the people's Bank of China has been creating new structured monetary policy instruments along the above two logical lines. In the key areas and weak links of the economy, new scientific and technological innovation, inclusive pension, support for the development and use of coal and enhanced energy storage re-loans have been added, and new special re-loans for logistics and civil aviation have been added.

What is the impact of re-lending instruments? The grasp of credit growth and the new channel of liquidity investment.

1) the grasp of credit growth.The people's Bank of China recently mentioned that 1 trillion yuan of new credit driven by re-lending is mainly driven by re-loans for supporting small and medium-sized agriculture, two carbon reduction tools, and re-loans for scientific and technological innovation. In addition, according to the idea of "priority areas of the national economy + bail-out", the people's Bank of China will most likely create new re-lending instruments this year, such as major manufacturing special re-loans, re-loans to support agricultural production, oil, natural gas and other industries, and rescue retail, tourism and other industries.

2) how do structured monetary policy instruments underpin the economy?If possible new re-lending instruments are included, structured monetary policy instruments are expected to drive financial institutions to lend close to 1.5 trillion yuan, which is important for the steady growth of credit this year. Limited by the epidemic in the short term, the policy may be difficult to implement. Once the epidemic cools down, structural monetary policy instruments will help stabilize growth quickly and effectively.

3) the new channel of liquidity investment.In addition to driving the credit demand of the real economy, the impact of structured monetary policy instruments on the banking system is becoming more and more obvious. First of all, with the use of structural instruments, the central bank put in a large number of reserves, making the interbank market full of liquidity; second, as a tool of targeted support, the central bank is more flexible to adjust structural instruments.

4) the investment of re-loans may also be the opportunity after the bottom of the equity market.

The following is the body:

On April 26, in an interview with the Financial Times on the current financial market situation, the relevant person in charge of the people's Bank of China said: "the people's Bank of China will increase the support of a prudent monetary policy to the real economy." in particular, we will support industries seriously affected by the epidemic, small and medium-sized enterprises and individual industrial and commercial households, support agricultural production and energy supply, and launch re-loans for scientific and technological innovation and universal pension. We will increase 100 billion yuan in re-loans to support the development and use of coal and enhance energy storage, increase small re-loans for supporting agriculture and special re-loans for civil aviation, maintain reasonable and abundant liquidity, promote the healthy and stable development of the financial market, and create a good monetary and financial environment. "[1]It can be seen that re-lending is still the starting point of the current monetary policy, in addition to defining the new quota of re-loans for supporting small agriculture, promoting scientific and technological innovation and universal pension special re-loans, two new re-loans have been added to support the development and use of coal and the enhancement of energy storage and civil aviation. In this article, we sort out and interpret the structured monetary policy tools such as re-lending.

First, how to understand the structured monetary policy tools? The central bank aims to support commercial banks in lending to related industries.

The so-called structured monetary policy tools refer to the rediscount tools of re-loans. it mainly includes the rediscount that has been landed, the re-loan for supporting small-scale agriculture, the support tool for carbon emission reduction and the re-loan for scientific and technological innovation in the process of creation, universal pension special re-loan, logistics industry re-loan and civil aviation special re-loan, etc. From the structural tools with clear details, we can see that the preferential interest rate, distribution target and usage amount of each tool are different, and the central bank will set the relevant details according to the characteristics of each industry.

However, these structural instruments still have something in common, that is, the "loan first and then borrow" mechanism. The people's Bank of China began to innovate the "first loan and then borrow" accounting model in 2018. Since 2020, the investment of re-loan funds has been managed by the accounting mode of "loan first and then loan". Compared with the traditional "loan before loan" model, the "loan before loan" model moves the examination and approval level of re-loan forward, realizing accurate drip irrigation in key areas. At the same time, the people's Bank of China requires banks to set up electronic accounts to track and monitor the use of funds to prevent the "leakage" of funds. We understand that this model further enhances the directness and accuracy of the central bank's monetary policy.

To support small and micro enterprises, for example, the people's Bank of China created a targeted medium-term Lending Facility (TMLF) tool at the end of 2018. However, after the epidemic, the TMLF tool has been withdrawn in an orderly manner, and the policy goal of supporting small and micro enterprises has been completely undertaken by the small re-lending tool. We understand that compared with TMLF, the main advantages of small loans are: (1) the reimbursement model of "loan first and then borrow" makes the central bank have stronger control over the whole support tool; (2) because of stronger control, the central bank can provide lower interest rate support (lower than MLF, lower 85BP VS than MLF).

To put it simply, the principle of structured monetary policy instruments is that commercial banks will be "reimbursed" for low-cost reserves if they lend to specific industries as required by the central bank, which is especially important for small banks.

Second, clarify the context of the creation of structural monetary policy instruments.

The implementation of traditional monetary policy requires transmission among various participants. Under such a system chain, the central bank plays the role of providing the ultimate liquidity to the banking system. On the other hand, the banking system meets the credit expansion needs of the real economic sector according to its own capital and risk preference. This means that some key directions of policy support, such as green, small and micro enterprises (inclusive) and manufacturing, may face a shortage of financial resources. Therefore, we understand that the main role of structured monetary policy instruments is to guide the flow of financial resources to key areas and weak links of national economic development. Under this logical chain, we see the creation of re-loans for supporting small-scale agriculture, supporting tools for carbon emission reduction, and re-loans for scientific and technological innovation.

The recent domestic epidemic has added another layer of logic to the structural monetary policy tool: bail-outs. The use of structural tools can provide targeted support to industries and enterprises severely affected by the epidemic. On April 6, the executive meeting of the State Council proposed to relieve poverty-stricken industries such as catering, retail, tourism, civil aviation, road, waterway and rail transport. We can see that the people's Bank of China has recently created re-loans in the field of logistics and special re-loans for civil aviation.

We have seen that since April, the people's Bank of China has been creating new structured monetary policy instruments along the above two logical lines. In the key areas and weak links of the economy, new scientific and technological innovation, inclusive pension, support for the development and use of coal and enhanced energy storage re-loans have been added, and new special re-loans for logistics and civil aviation have been added.

III. The influence of structured monetary policy instruments: the grasp of credit growth and the new channel of liquidity investment.

(1) all kinds of re-lending are expected to become the key to credit growth.

Recently, the people's Bank of China and the State Administration of Foreign Exchange issued the Circular on Financial Services for epidemic Prevention and Control and Economic and Social Development, which proposed 23 policy measures to strengthen financial services and support the real economy from three aspects: supporting the relief of stricken subjects, unblocking the circulation of the national economy, and promoting the development of foreign trade exports. Among them, the content of structural monetary policy tools is to "increase support for structural monetary policy instruments such as re-loans, make good use of small re-loans for supporting agriculture and two carbon reduction tools, and speed up the use of 100 billion re-loans in the field of transportation and logistics." the creation of 200 billion yuan of scientific and technological innovation re-loans and 40 billion yuan of universal pension re-loans are expected to drive the introduction of loans from financial institutions.An increase of 1 trillion yuan.」[2]

According to the current information, we can make a split. The above-mentioned 1 trillion yuan of new credit is mainly driven by 300 billion loans for small farmers, 500 billion for carbon reduction tools, and 200 billion for scientific and technological innovation. Of course, according to our understanding, there is a high probability that the people's Bank of China will create new re-lending instruments this year, such asSpecial loans for major manufacturing industries, loans to support agricultural production, oil, natural gas and other industries, and re-loans to rescue retail, tourism and other industries. If possible new re-lending instruments are included, we believe that structured monetary policy instruments are expected to drive financial institutions to lend close to 1.5 trillion yuan, which is important for the steady growth of credit this year. Of course, due to the constraints of the epidemic in the short term, it may be difficult to implement policies. Once the epidemic cools down, structural monetary policy instruments will help stabilize growth quickly and effectively.

(2) structural instruments have become an important channel for the central bank to release liquidity.

In addition to driving the credit demand of the real economy, the impact of structured monetary policy instruments on the banking system is becoming more and more obvious.First of all, with the use of structural instruments, the central bank put in a large number of reserves, making the interbank market full of liquidity; second, as a tool of targeted support, the central bank is more flexible to adjust structural instruments.

After 2014, the people's Bank of China changed the way of placing reserves, and its claims on the banking system became the "anchor" of the balance sheet expansion of the people's Bank of China. Before the epidemic, MLF was the main tool for the people's Bank of China to increase its claims on the banking system, so the change in the amount of MLF has a significant impact on the liquidity of the interbank market. However, it can be observed that since the outbreak (at the end of December 2019), the total size of the balance sheet of the people's Bank of China has increased by about 2.5 trillion and structured monetary policy instruments have increased by about 1.4 trillion. In other words, structured monetary policy instruments have become the main "anchor" for the balance sheet expansion of the people's Bank of China since the epidemic.

In the second half of 2021, some market participants calculate the excess reserve ratio according to the empirical model, and believe that liquidity will be tight in the money market in some periods. However, in practice, the money market remained stable during this period. The central bank responded in the form of a column in its monetary policy implementation report for the fourth quarter of 2021: "when analyzing the liquidity situation of the banking system, we should focus on the overall framework of the central bank's liquidity management rather than local factors. We should not simply add some long-term and short-term influencing factors to calculate the liquidity surplus and shortage, let alone take the maturity of monetary policy instruments as a factor affecting the liquidity of the banking system. And use this to judge the degree of liquidity tightness. "

We understand that what the central bank wants to describe is the problem that the traditional measurement of the overreserve rate underestimates the ample liquidity between banks. The general method to measure the overreserve rate is to take into account only changes in the maturity of medium-term lending facilities (MLF), cash, government bond issuance and open market operations. This approach ignores the structural monetary policy tools that have had the greatest impact on the monetary system since the epidemic, that is to say, the measurement of the excess reserve rate lacks the provision of reserves brought about by the use of structured monetary policy instruments. In this case, the money market interest rate is the most accurate indicator to observe the liquidity of the interbank market.

On the monetary control mechanism, the central bank once said: "perfect."Money supply control mechanismTo form the central bank regulationLiquidity created by bank money、Capital and interest rateConstrainedLong-term mechanismTo enhance the stability of total credit growth and keep the growth rate of money supply and social financing basically in line with the nominal economic growth rate. "

We understand that this long-term mechanism should refer to the regular and large-scale use of structured monetary policy instruments.

From the perspective of monetary credit system, banks are usually faced with the above three constraints: liquidity (the deposit reserve ratio required by the central bank), capital (their own capital) and interest rate (the financing demand of the real economy). The monetary policy tools we are familiar with (cutting reserve requirements and interest rates) are actually relaxing restrictions on banks when they create money. For example, the RRR cut actually reduces banks' demand for reserves, which in turn relaxes their liquidity constraints. However, when structural problems are prominent in the economy, the effectiveness of aggregate monetary policy will be greatly reduced, and structural policy will help to liberalize banks.

Under the "loan-then-borrow" mode of operation, structured monetary policy instruments can be targeted to provide liquidity support to banks that lend in industries that are really encouraged by the policy. For example, after the epidemic, the liquidity support that small banks received from the central bank increased simultaneously as the use of small refinancing increased.

With the creation and expansion of all kinds of re-lending instruments, when the amount of reserves generated by re-lending in the banking system is enough, it is even possible that "re-loan for MLF" will reduce the cost for banks. In this case, the policy necessity of cutting reserve requirements for banks to reduce costs will also be reduced, leaving room for subsequent reserve reduction policies for the central bank.

In addition, structured monetary policy instruments can boost financing demand by targeting lower lending rates in some industries. Bank loans to create deposits, need to cooperate with the loan demand, and the loan demand is not only affected by the real economic situation, but also largely restricted by the loan interest rate. Under the original aggregate policy, the central bank can only reduce policy interest rates to guide banks to lower lending rates in order to increase loan demand. However, under the current system, medium-and long-term policy interest rates such as MLF are often linked to the potential growth rate of China's economy, and its signal of reduction is too strong. On the other hand, structured monetary policy tools can solve the problem of financing demand directly. for example, in the use of carbon emission reduction support tools, the central bank will require commercial banks to issue loans in accordance with the LPR of the same period, and direct commercial banks to lower the interest rates of carbon emission reduction loans that meet the requirements. At present, it seems that structured monetary policy instruments will play a more and more important role in monetary policy.

As mentioned earlier, the direction of the creation of re-lending instruments is the key areas of the national economy and the industries that need policy relief due to the impact of the epidemic, then the industries where re-loans are invested may also be the investment opportunities after the equity market is bottomed out.

Risk hint

(1) the creation of structural monetary policy is not as expected.

(2) the decline in economic fundamentals has exceeded expectations.