What Does the Shift from Quantity-Based to Price-Based Monetary Regulation Framework Mean?(AI Translation)
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文｜财新周刊 王石玉 刘冉
By Caixin Weekly's Wang Shiyu and Liu Ran
近来金融市场感受到了一些变化：货币供应量增速创新低、新增社会融资规模罕见负增长，但并未带来降息降准；贷款定价的基准——贷款市场报价利率（LPR）三次与中期借贷便利（MLF）利率“脱钩”而单独下调。种种迹象表明，过去几年相对稳定的货币政策调控逻辑正在发生变化。
Lately, the financial markets have sensed a few changes: the growth rate of the money supply hit a record low, the new social financing scale saw a rare negative growth, yet these did not lead to interest rate cuts or reserve requirement ratio reductions. The Loan Prime Rate (LPR), the benchmark for loan pricing, was lowered independently three times without following the Medium-term Lending Facility (MLF) rate. All these signs suggest that the previously relatively stable logic of monetary policy management is undergoing changes.
2024年6月19日，中国央行行长潘功胜在第十五届陆家嘴论坛上，阐述了关于未来货币政策框架演进的几点思考，回应了市场关注。
On June 19, 2024, Pan Gongsheng, Governor of the People's Bank of China, addressed market concerns by outlining his thoughts on the future evolution of the monetary policy framework at the 15th Lujiazui Forum.
潘功胜指出，为了实现最终目标，货币政策需要关注和调控一些中间变量，主要发达经济体央行大多以价格型调控为主，而中国采用数量型和价格型调控并行的办法。“未来还可以继续优化货币政策中间变量，逐步淡化对数量目标的关注。需要把金融总量更多作为观测性、参考性、预期性的指标，更加注重发挥利率调控的作用。”
Pan Gongsheng pointed out that in order to achieve the ultimate objectives, monetary policy needs to focus on and regulate certain intermediate variables. Most central banks in major developed economies primarily use price-based regulation, whereas China adopts a combination of quantity-based and price-based regulation. "In the future, we can further optimize these intermediate variables in monetary policy and gradually reduce the emphasis on quantity targets. The total amount of finance should be more of an observational, referential, and expectancy indicator, while greater emphasis should be placed on the regulation of interest rates," he noted.
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- The People's Bank of China is transitioning to a monetary policy that emphasizes price-based regulation over quantity-based controls, signaling a significant shift in its approach.
- Governor Pan Gongsheng highlighted future policy directions at the Lujiazui Forum, including better market transparency and refined focus on short-term interest rate controls.
- The shift includes potential use of government bond trading as a liquidity management tool and optimization of current interest rate frameworks to ensure smoother policy transmission.
Lately, China's financial markets have seen significant changes, marked by record lows in money supply growth and a rare negative growth in the new social financing scale without corresponding interest rate cuts or reserve requirement ratio reductions [para. 1]. The Loan Prime Rate (LPR) was independently lowered three times without following the Medium-term Lending Facility (MLF) rate, signaling changes in the monetary policy management framework [para. 1][para. 2].
Addressing these concerns, Pan Gongsheng, Governor of the People's Bank of China, outlined the future monetary policy framework at the 15th Lujiazui Forum. He emphasized optimizing intermediate variables in monetary policy, with a shift from quantity targets to emphasizing interest rate regulation [para. 2][para. 3].
Historically, China's monetary policy relied on loan quotas and directive plans in 1984, transitioned to money supply as the main variable in 1998, and has been moving towards a price-based control since 2018 [para. 6][para. 7]. The quantitative control targets include the broad money supply (M2) and total social financing, whereas price control mainly relies on the interest rate system [para. 7]. This system follows a transmission path of "policy rate—benchmark rate—market rate," which channels the central bank's impact through to monetary, credit, and bond markets [para. 7].
Despite recent signals emphasizing price targets, further improvements in market-oriented interest rate control mechanisms are needed. Pan suggested that specifying a short-term operation rate as the main policy rate and moderately narrowing the width of the interest rate corridor could enhance the system [para. 8][para. 9][para. 10]. However, transforming the framework is a gradual process without urgency for short-term completion [para. 9].
A shift from quantity-based to price-based regulation marks a crucial step but has challenges. The public needs precise forward guidance to predict interest rate trends accurately [para. 11]. Pan noted that greater transparency and a credible policy communication mechanism would help the market form stable expectations regarding future monetary policies [para. 12].
China's quantitative indicators include money supply, new loans, and total social financing, with a significant slowdown in growth rates since 2008 [para. 14][para. 15][para. 16]. Optimizing aggregate indicators is necessary as the current money supply statistics have not evolved with financial innovations like mobile payments [para. 16][para. 17]. Including personal demand deposits and highly liquid financial products in M1 statistics could better reflect monetary functions [para. 17].
The scale of social financing, a significant quantitative indicator, grew to RMB 391.8 trillion by the end of May 2024 but saw a historic low in growth rate [para. 21][para. 22]. Economic growth now focuses on high-quality development, reducing the efficiency of traditional debt growth in driving investment [para. 23].
Adopting price-based controls involves selecting appropriate intermediate price variables. Pan suggested that a specific short-term interest rate as the key policy rate could provide clearer control signals [para. 24][para. 25]. Although the current interest rate regulation mechanism follows the "policy rate—benchmark rate—market rate" path, there are complexities and inefficiencies [para. 25].
Improving transmission mechanisms involve focusing on short-term policy rates and using an interest rate corridor [para. 25][para. 26]. Currently, the 7-day reverse repurchase rate acts as the short-term capital rate benchmark [para. 27][para. 28].
In transitioning to price-based regulation, enhancing the quality of LPR quotations is essential [para. 36]. Addressing deviations between LPR and actual prime rates offered to top customers would improve its guiding significance [para. 37]. However, achieving a complete price-based regulation framework will take time [para. 38].
New tools like secondary market government bond purchases and sales will enrich the monetary policy toolkit. Pan underscored the need to gradually include such transactions for liquidity management [para. 39]. With reduced foreign exchange purchases, the central bank has developed tools like open market operations and MLF to actively inject base money [para. 40].
Including government bond transactions in open market operations could enhance benchmark interest rates and guide capital prices [para. 46][para. 47]. Collaborative efforts with the Ministry of Finance are ongoing to optimize government bond transactions and their impact [para. 49][para. 50].
- Zheshang Securities
浙商证券 - Zheshang Securities' chief fixed income analyst, Han Qin, commented that although transitioning China's monetary policy framework from quantity-based to price-based is inevitable in the mid-term, there is no immediate urgency for a complete shift. Instead, near-term efforts should focus on optimizing specific details within the existing framework.
- China Post Securities
中邮证券 - The article cites China Post Securities' research report, which highlights the gradual shift in China's monetary policy framework from quantity-based to price-based control. It notes the necessity for a longer adjustment period and emphasizes the increasing importance of forward guidance in assessing monetary policy.
- China International Capital Corporation
中金公司 - The article does not mention China International Capital Corporation (CICC). It focuses on the evolution of China's monetary policy framework, the role of the People's Bank of China, and adjustments in monetary policy tools such as the Loan Prime Rate (LPR) and Medium-term Lending Facility (MLF) rates.
- Guohai Securities
国海证券 - Guohai Securities' research report notes that in commercial banks' liability structures, Medium-Term Lending Facility (MLF) accounts for a smaller portion compared to deposits. The firm suggests that lowering deposit costs could help create room for reducing Loan Prime Rate (LPR), implying that MLF's policy effectiveness may become less significant in the future.
- Huatai Securities
华泰证券 - The article references Huatai Securities in the context of China's interest rate transmission mechanism. Huatai Securities' fixed income research report suggests that the current issue is the excessive number of policy and benchmark interest rates. They recommend gradually weakening or even phasing out some rates that were initially meant to serve the transition to interest rate liberalization.
- TF Securities
天风证券 - TF Securities' Fixed Income Chief Analyst, Qin Han, believes that while there may be better mid-term solutions for improving the monetary policy framework, the urgency for short-term switches is low. As the economy evolves towards high-quality development, a shift from quantity-based to price-based policy is inevitable, though it will be a gradual process requiring ongoing reforms and adjustments.
- Sinolink Securities
国投证券 - The article doesn't mention Sinolink Securities. It focuses on the evolution of China's monetary policy framework, highlighting recent trends, perspectives from key figures like PBOC Governor Pan Gongsheng, and the gradual shift from quantity-based to price-based regulation, among other monetary policy considerations.
- Standard Chartered Bank
渣打银行 - Standard Chartered Bank's Chief Economist, Ding Shuang, is mentioned in the article. He pointed out that if China's future opportunities for lowering reserve requirements decrease and stage-specific re-lending tools exit, the central bank may rely more on buying and selling government bonds to regulate liquidity.
- Huachuang Securities
华创证券 - Huachuang Securities is mentioned in the article in relation to Zhou Guannan, their chief fixed-income analyst. Huachuang Securities notes that the reintroduction of bond trading by the People's Bank of China (PBOC) will enhance the guiding role of government bond yields as a market benchmark.
- Nomura Securities
野村证券 - Nomura Securities' China Chief Economist, Lu Ting, mentioned that the U.S. ceased adhering to M2 after the 1970s due to increased financial disintermediation. Since the 1980s, few countries focus on M2, which indicates a shift from quantity-based to price-based monetary policy regulation.
- In 1984：
- China's central banking system was established, primarily relying on loan quotas and directive plans.
- In 1998：
- The People's Bank of China abolished credit scale control, making the money supply the main intermediate variable of monetary policy.
- At the end of 2018：
- PBOC Governor Yi Gang stated China is transitioning from a quantity-based control to a price-based control.
- In April 2019：
- Then Deputy Governor Liu Guoqiang emphasized the importance of liquidity and suggested the interbank repo rate as an indicator.
- In January 2024：
- The 10-year government bond yield fell below 2.5%, creating a significant spread with the one-year MLF rate.
- In February 2024：
- The LPR for over five years was cut by 25 basis points to 3.95% while the one-year MLF rate remained unchanged.
- As of the end of May 2024：
- The M2 balance stood at 301.8 trillion yuan, with a year-on-year growth rate of 7%. The M1 balance was 64.7 trillion yuan, with a year-on-year growth rate of -4.2%.
- As of the end of May 2024：
- The scale of outstanding social financing was RMB 391.8 trillion, marking a year-on-year increase of 8.4%.
- On June 19, 2024：
- Pan Gongsheng, Governor of the People's Bank of China, addressed market concerns at the 15th Lujiazui Forum regarding the future evolution of the monetary policy framework.
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