PBoC Still Blasting MoF, Says Market Needs Fiscal, Regulatory Support

An article appeared in China's "Financial Times" (金融时报), a PBoC newspaper.

Caijing: 央行旗下报纸：宽货币难解紧信用 财政发力余地较大

Recently, intense discussions on monetary and fiscal policies have attracted widespread attention.

From the perspective of monetary policy, since the beginning of this year, the central bank has implemented three RRR cuts, coupled with tools such as the Medium Term Lending Facility (MLF), which have already placed medium and long-term liquidity of about 2.8 trillion yuan, far exceeding the total of 1.76 trillion yuan last year. sum. In the second quarter of the Central Bank's Monetary Policy Committee, the liquidity target will be changed from “reasonable stability” to “reasonable abundance”. In this context, the funds in the interbank market continued to be loose this year, and the money market interest rate fell to a new low in recent years.

However, the performance of financial data is not satisfactory, and the growth rate of M2 and social financing is low or even deviating. At the end of June this year, M2 increased by 8.0% year-on-year, and the growth rate dropped by 0.3 percentage points from May, hitting a record low. In June, the increase in the scale of new social financing was 1.18 trillion yuan, a year-on-year increase of nearly 600 billion yuan. From the first half of the year, from January to June, the cumulative increase in social financing scale was 9.1 trillion yuan, 2.03 trillion yuan less than the same period of the previous year.

Chen Jianheng, a fixed-income analyst of CICC, referred to the above liquidity pattern as “generalized tightness and narrow sense of looseness”, that is, strict supervision led to a decrease in the financial institutions’ investment, and the derivation of deposits was correspondingly reduced, and the generalized liquidity gradually tightened, but At the same time, monetary policy margins have become looser, narrower liquidity has improved, and money market interest rates have begun to fall from the highs at the beginning of the year. He also said that in the strict regulatory environment, the looseness of narrow liquidity is difficult to transfer to generalized liquidity. Because the current financial strict regulatory policies have led to a general decline in financial institutions' risk appetite, and this risk appetite declines, it is not a simple central bank to increase liquidity and increase credit lines can be resolved.

"The continuation of the generalized liquidity and the narrowness of the narrow liquidity means that relying on the stimulation of traditional monetary policy will not help to improve the current situation of risk appetite under strict supervision." Chen Jianheng said.

Hard for "Broad money" to solve "tight credit"

Regarding the downturn in social financing, it is clear that the new regulations on assets control strictly restrict the business of providing credit for “shadow banking”, non-standard financing continues to decline, net financing is negative for several months, and social financing growth rate also declines. Monetary policy continued to exert momentum, and M2 remained basically stable. "Overall, the new regulations for asset management are blocking the door, and non-standard financing has fallen sharply, but the main entrance is difficult to open. Although the increase in new RMB loans has increased, it is difficult to stop the decline in social financing." Ming said.

It is clear that the marginal monetary policy tends to be loose, and the mid-stream financial system may be able to transfer liquidity to the real economy because of the reduced risk appetite. This is the current situation that “wide currency” cannot solve the “tight credit” structural problem.

"The more generalized liquidity is tightened, the more it is hedged by the looseness of narrow liquidity. The result can only lead to further differentiation of liquidity, drought and drought, and sudden death." Chen Jianheng said that the financial system risk appetite The problem of decline, relying solely on the individual policies of one or two ministries, has a limited role. It is imperative that the first thing to stabilize the money growth rate or even the money growth rate depends on a more active fiscal policy and a modest adjustment of financial supervision.

The PBoC doesn't want to solve tight liquidity with easy money because the PBoC doesn't want to blow another credit bubble or destroy the currency. Better for the government to use fiscal policy for support.

There is ample room for fiscal policy

From the perspective of public revenue and expenditure, as of the second quarter of 2018, the national public finance revenue increased by 10.6% year-on-year, while the national public finance expenditure increased by 7.8%. From the perspective of the deficit rate, the fiscal deficit rate in 2018 is 2.6%, which is less than the 3% deficit rate in the previous two years.

"So whether it is from the first half of this year, the growth rate of public finance revenue is higher than public finance expenditure, or the reduction of the deficit rate in 2018, there is still much room for fiscal policy to exert force," Ming said.

Chen Jianheng said that the growth rate of fiscal revenue in the first half of the year was still higher than the economic and monetary growth rate, and the growth rate of fiscal expenditure was also slow. It was the slowest year in recent years, which led to an increase in the growth rate of fiscal deposits in the first half of the year. Thus crowding corporate deposits. In the second half of the year, if the growth rate of fiscal expenditures accelerates and the strength of revitalizing stocks is increased, then the expenditure on fiscal deposits will help the recovery of corporate deposits, and fiscal expenditures will also provide a certain source of physical profits, alleviating the impact of deleveraging. .

Judging from the national public finance income structure, the central government's fiscal revenue in the first half of 2018 accounted for 48% of the national public finance revenue, the highest proportion in the past five years. From the perspective of the national public finance expenditure structure, the central government's fiscal expenditure accounted for 14% of the national public finance expenditure in the first half of 2018, and the ratio has remained at 15% for a long time since 2010. It is clear that the central government's fiscal revenue is higher, but the central government's fiscal expenditure is gradually decreasing. This shows that the current fiscal structure is lacking in balance, and the local financial power and power mismatch still exist.

Regulators can also ease their deleveraging efforts. The PBoC says tight regulations are causing the contraction in credit, not monetary policy.

Regulatory policies should grasp the strength and rhythm

From the latest data, credit volume is still insufficient to support the decline in off-balance-sheet business and the drag on social financing. It is clearly emphasized that it is necessary to be alert to the impact of regulatory over-contracting business on the overall economy. At this time, the intensity and pace of supervision are particularly important.

Chen Jianheng further stated that the intensity of financial regulation tightening can also be moderately adjusted. Especially after the new regulations for asset management, new financial regulations with more details are also attracting attention. Bank financing is waiting for the details to be put in order to fully cope with and rectify. However, the financial rules should not be too strict, otherwise the bank's risk appetite will be difficult to suppress, which will make the financing of SMEs more difficult and structural contradictions difficult to alleviate.

Recently, the market is paying more and more attention to new financial regulations. As the wealth management products have reached a huge scale of about 30 trillion yuan, the new regulations will have certain impact on themselves and on the market; in addition, considering the current trade war is constantly fermenting, the economic operation data is not optimistic, and the bond market default is expected. New domestic financial management regulations have been postponed.

As a new type of direct financing, wealth management provides clients with funds through financing, non-standard credit, equity, etc., and contributes to the development of the real economy. However, after the introduction of the new regulations on asset management, due to the lack of guidelines for supporting the rules, the issuance and withdrawal of some of the wealth management business of commercial banks were suppressed. At the same time, the suspension of the new regulations triggered multiple speculations in the market, and some businesses could not be carried out as expected.

"Therefore, whether it is from the perspective of financial support for the real economy, or from the perspective of guiding market expectations, new financial regulations should be introduced as soon as possible." Ming Ming said.