China[元/¥]

Institutional framework

Article 3 of the Law of the People's Republic of China on the People's Bank of China establishes that "the objective of monetary policy is to maintain the stability of the value of the currency and thereby promote economic growth."

Article 2 of the Law of the People's Republic of China on the People's Bank of China establishes that "the People's Bank of China shall, under the leadership of the State Council, formulate and implement monetary policy"

Article 23 of the Law of the People's Republic of China on the People's Bank of China establishes that "to implement monetary policy, the People's Bank of China may use the following monetary policy instruments: (1) requiring banking financial institutions to place deposit reserves at a prescribed ratio; (2) deciding on the benchmark interest rates of the central bank; (3) providing discount services to banking financial institutions that have opened accounts in the People's Bank of China; (4) providing loans to commercial banks; (5) purchasing and selling central government bonds and other government securities, financial bonds, and foreign exchange on the open market; and (6) other monetary policy instruments decided by the State Council".

Key features of the monetary policy implementation framework

First, a series of monetary-policy instruments, including Open Market Operation (OMO), Required Reserve Ratio (RRR), Medium-term Lending Facility (MLF), and Standing Lending Facility (SLF) etc are employed to manage liquidity in the banking system.

With recent reform, the PBC established a new RRR framework featuring "three tranches of reserve requirements and two additional preferential treatments" to guide small and medium-sized banks to provide services to local enterprises and to the real economy. "Three tranches" refer to three levels of the RRR based on the systemic importance, the institution type, and service positioning of the financial institutions. The first tranche applies to large banks to reflect the requirements to prevent systemic risks and maintain financial stability. The second tranche, whose RRR is slightly lower, applies to medium-sized banks, including joint-stock commercial banks and city commercial banks. The third tranche applies to small banks, which include rural credit cooperatives, rural cooperative banks, village banks and rural commercial banks operating and providing services to counties. "Two additional preferential treatments" refer to two preferential policies based on the three-tranches. First, first and second tranche banks that have met the evaluation criteria for the targeted RRR cuts for inclusive finance will be eligible for further RRR cuts of 0.5 percentage point or 1.5 percentage points. Second, for banks that operate and provide services to counties, when their local lending accounts for a certain proportion of the increment in their deposits, they will be eligible for a further RRR cut of 1 percentage point. And besides, the PBC also adjusted the criteria for assessing inclusive Micro and Small Businesses (MSBs) loans to expand coverage of the preferential policy on targeted reserve requirement ratio cuts for inclusive financing.

Second, the PBC established a preliminary policy interest-rate system including short-term policy rate which is OMO rate, mid-term policy rate which is MLF rate, and interest rate corridor, the ceiling of the corridor is SLF rate, and the bottom of the corridor is excessive reserve rate.

With recent reform, the PBC worked to improve the LPR formation mechanism among commercial banks and to have the LPR play a guiding role in the formation of real interest rates so as to improve the market-based interest-rate formation and transmission mechanism, which smoothed the transmission of policy rates to market rates and promoted a reduction in the real interest rates for the financing of enterprises. The quote is formed by adding a few basis points to the interest rate of open market operations, which mainly refers to the rate of Medium-term Lending Facility, or MLF, with a maturity of one year in most cases. In addition to the previous one-year maturity. The LPR will also cover the maturity longer than five years, which will serve as the pricing reference for bank's long-term loans such as housing mortgage, and facilitate a steady transition of outstanding long-term loan contracts with floating rates to the ones adopting LPR in the future.

Third, the PBC leverages targeted RRR reductions, central-bank lending, rediscounts, Pledged Supplementary Lending (PSL), Targeted MLF (TMLF) etc. to guide financial institutions to increase support for the key sectors and weak areas in the economy, such as MSBs and private firms.

Fourth, the PBC enhanced macro-prudential management and gave full play to the role of the macro-prudential assessment (MPA) in counter-cyclical adjustments and structural guidance.

Fifth, the exchange-rate regime reform has achieved great progress. The flexibility of exchange rate of RMB has been obviously increased, which is mainly driven by market forces. The RMB exchange rate fluctuated in both ways based on market supply and demand in reference to a basket of currencies and it was basically stable at a reasonable and equilibrium level.

Sixth, the PBC paid great attention to enhance the communication with public through a variety of channels, like press conferences, monetary policy reports, statements on PBC website, newspaper and official account of some popular social media, for example, Wechat and Weibo.