Event

On August 6, 2020, the central bank released the second-quarter report on the implementation of China's monetary policy.

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1. Core points:

1) the monetary policy implementation report for the second quarter shows four major changes:

① deletes "Total" Policy and increases "Precision orientation". As economic growth returns to potential growth, monetary policy should return to normal and accurate drip irrigation.

② deletes the expression that "the growth rate of M2 and social financing scale basically matches and slightly higher than that of nominal GDP", and mentions again "reasonable growth of money supply and social financing scale".. The second half of the year will guide M2 and social finance growth back to normal.

③ deletes "enhanced countercyclical regulation" and changes it to "cross-cyclical design and regulation". Monetary policy should strike a balance between stable growth and risk prevention, and pay attention to the balance between short-term and medium-and long-term.

④ added "guide the market interest rate to run smoothly around the open market operating rate and the medium-term lending convenience rate". At present, the interest rates of DR007 and 1-year treasury bonds fluctuate around the 7-day OMO interest rate, and the interest rates of 1-year interbank certificates of deposit and 10-year treasury bonds are gradually approaching the 1-year MLF interest rate. In the future, it is necessary to guide the market interest rate to operate within a reasonable range through the policy interest rate, but it is only too high to be low.

2) to reduce the social comprehensive financing cost, the key is to open up the transmission channel of "OMO-MLF-LPR- loan interest rate".

The strength of "living in a house without speculation" is strong.In the second quarter, continuing the trend in the first quarter, the interest rate of personal housing loans was higher than the general lending rate 16BP.

3) from the perspective of economic fundamentals, China is ahead of the world in controlling the epidemic and resuming production, and the economy has steadily recovered, but the global epidemic situation is grim, the world economy is in deep recession, trade frictions between China and the United States have intensified, and monetary policy does not yet have the conditions to tighten. We expect monetary policy to move from ultra-loose to structural easing.

4) from the perspective of inflation, the combination of CPI decline and PPI rebound in the second half of the year is within the policy range, and monetary policy will pay more attention to broad inflation and financial stability, including house prices and stock prices.

5) judging from the overseas situation, the global epidemic situation is grim, the world economy is in deep recession, Trump's election situation is urgent, and Sino-US trade frictions have intensified.

6）Looking forward to the second half of the year, from "counter-cyclical adjustment" to "cross-cyclical adjustment", from ultra-loose to structural easing, monetary policy should strike a balance between stable growth and risk prevention.

First, "cross-cycle regulation" should take into account both short-term and medium-and long-term.We should strike a balance between stable growth and risk prevention. Excessive relaxation of stable growth should not lead to risk accumulation, nor should premature tightening lead to economic downturn because of risk prevention.

Second, structural monetary policy emphasizes "precise delivery".，即Strengthen the MPA assessment of medium-and long-term financing of the manufacturing industry, private enterprises and small and micro enterprises credit, "three grades and two advantages" targeted reduction, re-loan, re-discount, innovation of monetary policy tools directly to the real economy.

Third, the key to reducing the comprehensive financing cost is to dredge the interest rate transmission.Improve the transmission mechanism of "MLF-LPR- loan interest rate".

Fourth, the central bank does not want to see zero and negative interest rates.Too low interest rates will lead to negative effects such as excessive pressure on commercial banks, mismatch of resources, excessive leverage, out-of-reality and so on. It is neither too high nor too low to guide the market interest rates to run smoothly around OMO and MLF interest rates.

2. Monetary policy deletes the "aggregate" operation and emphasizes cross-cycle adjustment and precise guidance.

The implementation report for the second quarter showed four major changes.

1）Delete the "total quantity" policy and increase the "precision orientation". In the first half of the year, starting from epidemic prevention and control and economic reality, aggregate policy and structural policy made efforts at the same time, but as economic growth returned to potential growth, monetary policy should return to normal and accurate drip irrigation.

2）Delete the expression that "the growth rate of M2 and social financing scale basically matches and slightly higher than the nominal GDP growth rate", and mention again "reasonable growth of money supply and social financing scale".. In June, M2 grew by 11.1% over the same period last year, and the stock of social integration increased by 12.8% over the same period last year, which is significantly higher than that in 2019. The fundamentals of stable, long-term, and high-quality development of our economy remain unchanged, and we will gradually guide the rational growth of M2 and social integration in the second half of the year.

3）Delete "strengthen counter-cyclical regulation" and replace it with "cross-cyclical design and regulation to achieve a balance between stable growth and risk prevention"The focus of monetary policy has shifted from short-term epidemic response to short-term and medium-to long-term balance.

4）The new "guide the market interest rate to operate smoothly around the open market operating rate and the medium-term lending convenience rate". The central bank believes that the current policy interest rate is relatively reasonable. at present, the DR007 interest rate and the 1-year treasury bond interest rate fluctuate around 2.2% of the 7-day OMO interest rate, the 1-year interbank deposit rate and the 10-year treasury bond interest rate fluctuate around 2.95% of the 1-year MLF rate, and the lending rate fluctuates basically in the same range as the MLF interest rate and the LPR interest rate. we will continue to play the guiding role of the policy interest rate in the future and guide the market interest rate to fluctuate in a reasonable range. But high is no more than low.

3. The central bank emphasizes that the monetary policy should be accurate drip irrigation to improve the directness of the policy. The four major structured monetary policy instruments will play an important role in the second half of the year.

From the perspective of policy orientationThe central bank emphasizes giving full play to the precise drip irrigation role of structural monetary policy tools to improve the "accessibility" of policy.To increase support for medium-and long-term financing of the real economy, especially small and medium-sized enterprises, supporting agriculture, private enterprises and manufacturing industries.

From the perspective of policy operation, the current structural monetary policy mainly includes four major tools, and the central bank emphasizes the further improvement of the system of structural monetary policy instruments.

1) under the "three-tier and two-excellent" deposit reserve framework, the central bank released about 950 billion yuan in two targeted reserve cuts in the first half of the year.

2) the policy of reloan and rediscount. In the first half of the year, the central bank successively introduced 300 billion yuan of special reloan and 1.5 trillion yuan of universal reloan rediscount policy.

3) innovative monetary policy tools that go directly to entities. On June 1st, the central bank provided 440 billion yuan in re-loan funds to create a loan extension support tool for inclusive small and micro enterprises and a credit support tool for inclusive small and micro enterprises. 4) according to the MPA assessment, in the first half of the year, the central bank gave full play to the structural guiding role of MPA tools to further strengthen the relevant assessment of small and micro enterprises, private enterprises and manufacturing financing.

4. To reduce the comprehensive financing cost, it is the key to open up the transmission channel of "OMO-MLF-LPR- loan interest rate". "Housing speculation" is strong, and the interest rate of personal housing loans continues to be higher than that of general loans.

The interest rate of OMO-MLF-LPR- loan increases the transmission efficiency.1) in June 2020, the 1-year and 5-year LPR quotations have been reduced by 30BP and 15BP respectively compared with December last year. Lending rates continued to fall against the backdrop of a sharp rise in bond market interest rates from May to June. The weighted average interest rate on loans was 5.06 per cent, down 38BP from December last year, while the general lending rate was 5.26 per cent, down 48BP from December last year and exceeding the LPR decline over the same period. 2) the benchmark conversion of stock loans has been carried out in an orderly manner. by the end of June, 55% of the stock anchor has been changed, of which the progress of stock enterprise loan conversion has reached 76%. 3) the downward loan interest rate has forced banks to reduce the cost on the debt side, and some banks have taken the initiative to lower deposit interest rates. Structured deposits and bank wealth management interest rates have declined, and the loan interest rate reform will help promote the marketization of deposit interest rates.

It is worth noting that in the first quarter of 2020, the personal housing loan interest rate was higher than the general loan interest rate for the first time, and continued the trend in the second quarter. The personal housing loan interest rate was higher than the general loan interest rate 16BP, which fully reflected the policy tone and determination of "housing speculation".

5、From the perspective of economic fundamentals, China leads the world in controlling the epidemic and resuming work and production, and the economy recovers steadily, but the global epidemic situation is grim, the world economy is in deep recession, trade frictions between China and the United States have intensified, and monetary policy does not yet have the conditions to tighten. We expect monetary policy to move from ultra-loose to structural loose.

The domestic epidemic situation has been effectively prevented and controlled, the resumption of work and production has improved month by month, the economy has steadily recovered since March, and GDP increased by 3.2% in the second quarter compared with the same period last year. In the second quarter, against the background of severe epidemic situation overseas and substantial negative economic growth in major economies, domestic GDP grew 3.2% year on year, rising sharply by 10 percentage points compared with the first quarter, and the troika recovered to varying degrees.

From the perspective of investmentIn June, it was 5.6% year-on-year, the third consecutive month of positive growth. In the second half of the year, the fiscal policy will continue to be effective and effective, and the efficiency of expenditure is expected to be improved to support infrastructure investment.

From the perspective of consumptionIn June, the total social zero actually improved weakly compared with the same period last year, but it was still in a negative range, and the space for consumption recovery in the second half of the year was restricted by the employment situation and residents' income.

Judging from the exit,In June, China's exports were 0.5% year-on-year. Epidemic prevention materials and "residential" economic consumer goods were the main support for higher-than-expected exports in the second quarter. Future exports depend on the global epidemic, the resumption of work and the progress of Sino-US trade frictions.

Judging from PMI,In July, the manufacturing PMI was 51.1%, which was in the boom range for five consecutive months, and production and demand continued to pick up.However, it is worth noting that the global epidemic situation is severe, the world economy is in deep recession, trade frictions between China and the United States have intensified, and monetary policy does not yet have the conditions to tighten. We expect monetary policy to move from ultra-loose to structural loose.

The decline in PPI continued to narrow, CPI briefly rose due to supply shocks, and core CPI continued to decline.In July, PPI was 0.4% month-on-month, further narrowing year-on-year decline to-2.4%. In the second half of the year, overseas economy gradually recovered, domestic infrastructure investment supported demand, and PPI is expected to pick up year-on-year shocks. In July, CPI turned positive to 0.6% month-on-month, rebounding slightly to 2.7% from a year earlier, mainly due to a brief rise in pork and fresh vegetable prices, and the core CPI continued to decline. As the tail-warping factor declines in the second half of the year, CPI will continue to decline compared with the same period last year.The combination of CPI decline and PPI rally is within the policy range, and monetary policy will pay more attention to broad inflation and financial stability, including house prices and stock prices.

Looking forward to the second half of the year, the domestic economy is in a weak recovery channel, but the foundation is not solid, and multiple hidden worries remain, so it is necessary to guard against the risk of a second economic downturn.First, there is a second outbreak of the epidemic in the United States, while the epidemic in India, Brazil and other emerging economies is still severe; second, there is a risk of a second outbreak of the domestic epidemic in autumn and winter; and third, the "China card" has become a lifesaver for Trump to win over voters. There is a risk of deterioration in Sino-US economic and trade relations; fourth, local fiscal revenue has fallen sharply; fifth, the employment pressure on residents is greater, and consumption has rebounded slowly.

6. Judging from the overseas situation, the global epidemic situation is grim, the world economy is in deep recession, Trump's election situation is urgent, and Sino-US trade frictions have intensified.

The global epidemic situation is grim, the world economy is in deep recession, Trump's election situation is urgent, and Sino-US trade frictions have intensified.

1）Overseas outbreaks have not yet been effectively controlled.The United States, Japan, Spain, Australia and other countries broke out for the second time, and new confirmed cases continued to rise in India, Brazil, Africa and other places.

2）The economic growth of the world's major economies was sharply negative in the second quarter.Under the impact of the epidemic, the world economy was in deep recession. In the second quarter, GDP in the United States was-9.5% compared with the same period last year, and GDP in the euro area was-15.0% in the same period last year, the largest decline since World War II. Manufacturing PMI in the United States, the euro zone and Germany returned to above the boom-bust line in July, but it is still in the early stages of economic recovery.

3）Major economies such as Europe, the United States and Japan have stepped up monetary easing.Central banks in major economies kept interest rates low and stepped up asset purchases, while the balance sheets of the Federal Reserve, the European Central Bank and the Bank of England expanded rapidly. The macro-policy space of major economies has been further reduced, and the economic and financial fragility has been deepened.

4）The international environment is unstable and uncertainty is increasing.With a severe epidemic in the United States and a sharp economic recession, the "China card" has become a lifesaver for Trump to win votes, courting voters by being tough on China in the fields of trade, diplomacy, geopolitics, science and technology.

Looking ahead, five major risks remain.First, epidemic prevention and control and resumption of work and production need a better balance. Second, enterprises are faced with the problem of insufficient solvency, which may lead to a wave of bankruptcy and downgrade. Third, global leverage has risen further. Fourth, there are hidden risks in the financial market. Fifth, external instability and uncertainties have increased significantly, geopolitical tensions are on the rise, and economic and trade frictions between some countries are deepening day by day.

7. Looking forward to the second half of the year, from "counter-cyclical adjustment" to "cross-cyclical adjustment", from ultra-loose to structural easing, monetary policy should take into account both stable growth and risk prevention.

First, monetary policy changes from "counter-cyclical adjustment" to "cross-cyclical design and regulation", from ultra-loose to structural loose, taking into account both stable growth and risk prevention, and improve the long-term mechanism of real estate.730 the Politburo meeting proposed "cross-cycle" for the first time, and this implementation report once again pointed out that monetary policy should be "cross-cyclical design and adjustment". Previously, monetary policy emphasized "counter-cyclical adjustment", aimed at smoothing short-term economic fluctuations, while "cross-cyclical adjustment" needed to strike a balance between short-term and medium-and long-term, stable growth and risk prevention, and should not lead to risk accumulation due to over-relaxation of stable growth. nor can premature tightening lead to economic downturn because of risk prevention.

Second, the structural monetary policy should be accurately implemented, that is, in the second half of the year, the MPA should strengthen the assessment of medium-and long-term financing of the manufacturing industry, private enterprises and small and micro enterprises, "three grades and two advantages" targeted reduction, re-loan, re-discount, and innovation of monetary policy tools directly to the real economy.To effectively guarantee financial support for agriculture-related, small and micro, private enterprises and industries seriously affected by the epidemic.

Third, reduce the comprehensive financing cost and improve the transmission of "MLF-LPR- loan interest rate".At present, the 7-day OMO interest rate 2.2% the 1-year MLF interest rate 2.95% and the 1-year treasury bond interest rate basically fluctuate around the 7-day OMO interest rate, the 1-year interbank deposit rate and the 10-year treasury bond interest rate basically fluctuate around the 1-year MLF interest rate, and the interest rate transmission mechanism between banks and the bond market is relatively smooth. The interest rate transmission of MLF-LPR- loans has been gradually opened since the reform, and the three interest rates have fallen respectively from the beginning of 2020 to 30BP, 30BP and 38BP.

Fourth, the PBoC does not want to see zero or negative interest rates, so it wants to guide market interest rates to run smoothly around OMO and MLF interest rates.Interest rate is a country's potential economic growth rate, China's potential economic growth rate is still high, ultra-low interest rates can not effectively promote economic growth, but also bring great pressure on the banking system, excessive leverage, mismatch of resources, unreality and other problems. Therefore, the central bank should guide the market interest rate to run smoothly around OMO and MLF interest rates, neither too high nor too low.