Stability and Toughness: Three-character Formula of Monetary Policy in the Next Stage

In the second half of 2020, the video conference on the work of the central bank was held, and the China monetary policy implementation report was released in the second quarter, which made the direction of the subsequent monetary policy clear. The author believes that the monetary policy in the next stage will adhere to the formula of "stability, accuracy and tightness", handle the relationship between stable growth, employment protection, structural adjustment, risk prevention and inflation control, and achieve a long-term balance between stable growth and risk prevention.

"Stability" contains two meanings: First, financial support stabilizes enterprises and guarantees employment. This year's "Government Work Report" puts forward specific requirements for financial support to stabilize enterprises and ensure employment. The central bank has conducted many special studies on "protecting market players" and issued the "Guidelines for Financial Support to Stabilize Enterprises and Ensure Employment".

On the morning of July 3 1, Yi Gang, the governor of the central bank, pointed out that innovating financial services, actively adapting to the new requirements of enterprise financing, ensuring the effective policy of directly entering the real economy, and providing financial support for stabilizing enterprises, ensuring employment and developing the real economy. All relevant departments and business management departments should seriously study and further improve the pertinence and effectiveness of the implementation of monetary and credit policies.

Since the outbreak of the COVID-19 epidemic, the central bank has decisively stepped up the counter-cyclical adjustment of monetary policy, and made important contributions to stabilizing enterprises, ensuring employment and benefiting the real economy in terms of liquidity, downward interest rates and innovating direct policy tools. In the follow-up, monetary policy will still maintain a certain strength in stabilizing enterprises and ensuring employment.

Another meaning of "prudent" is that the prudent orientation of monetary policy will not change, but it is necessary to "improve the cross-cycle design and adjustment" (this formulation first appeared in the monetary policy implementation report, which is an initiative to implement the spirit of Politburo meeting of the Chinese Communist Party on July 30). Although monetary policy has shown flexibility and moderation in responding to the epidemic, the basic orientation of stability has not changed. As the epidemic entered the normal state of prevention and control, the flexible emergency policies introduced during the epidemic period were gradually withdrawn. The deterioration of the international economic environment requires that a prudent monetary policy must consider the problem of "cross-cycle design and adjustment" This is the proper meaning of countercyclical adjustment and a forward-looking move.

"Quasi" means that monetary policy is implemented accurately and takes effect immediately. Although we say that the subsequent monetary policy will return to normalization, a correct understanding of the current normalization is inseparable from the word "quasi".

The "Government Work Report" puts forward that "the monetary policy tools that go directly to the real economy should be innovated", and the monetary policy proposed by the central bank should be more flexible, moderate and accurate, with the aim of helping the real economy tide over the difficulties and seeking more stable and long-term development after returning to the normal development track. In other words, the direction of policy application should be accurate to ensure that "medicine" can cure diseases.

In the application of specific monetary policy tools, in addition to focusing on the implementation of two direct tools, namely 1 trillion yuan refinancing rediscount policy, deferred repayment by enterprises, and expanded credit loans, it is also necessary to optimize the structure and control the rhythm, promote the substantial growth of inclusive loans for small and micro enterprises and medium-and long-term loans for manufacturing industries, significantly reduce the financing costs of enterprises, and effectively promote the financial system to benefit enterprises. This is the difficulty and focus of the subsequent use of monetary policy tools.

"Toughness" means that we will never be soft in preventing and resolving major financial risks, and monetary and financial policies should also give necessary support. The central bank has repeatedly stressed that it is necessary to "hold the bottom line and continue to fight a three-year battle to prevent and resolve major financial risks." At present, this work has achieved significant milestones, such as the completion of risk disposal of Baoshang Bank and the establishment and opening of Shang Meng Bank. Other risk factors are being effectively solved.

From the financial risk cases that have been handled, it can be seen that the principle pursued by the financial regulatory authorities is to steadily push forward various risk resolution tasks without mercy and firmly hold the bottom line that no systemic financial risks will occur. In the second quarter monetary policy implementation report, the central bank disclosed that the central bank and the China Banking Regulatory Commission, together with relevant departments, had instructed commercial banks to carry out stress tests, increased the provision and write-off of non-performing loan losses, and improved their ability to resist risks and serve the real economy. It can be seen that the intensity of risk prevention will not be reduced.

The formula of "stability, accuracy and reality" mentioned above is an important point of view of subsequent monetary policy, and it is also an element that investors in the A-share market must pay attention to when judging the general trend. In particular, the new formulation of "improving intertemporal design and adjustment" needs further study.