gist

On April 26, the People’s Bank of China stated that it would add two new loans to support the development and use of coal and enhance energy storage and civil aviation. The creation of the re-lending facility has become the focus of the current monetary policy.

What are structural monetary policy tools? Structural monetary policy tools refer to re-lending and re-discounting tools, mainly including existing re-discounting, re-lending to support small and medium-sized farmers, carbon emission reduction support tools, and technological innovation re-lending in the process of creation, and special re-lending for inclusive pensions. Loans, re-loans for the logistics industry and special re-loans for civil aviation, etc. Each tool has different preferential interest rates, issuing objects, and usage limits. The central bank will set relevant details according to the characteristics of each industry, and adopt the mechanism of “lending first and then borrowing”. The principle of structural monetary policy tools is that commercial banks extend credit to specific industries in accordance with the requirements of the central bank and obtain low-cost reserve “reimbursement”, which is very attractive to small banks.

How to understand its creation logic? Key areas of the national economy + bailouts. We understand that the main role of structural monetary policy tools is to guide the flow of financial resources to the key areas and weak links of national economic development. The recent domestic epidemic has added another layer of logic to structural monetary policy tools: bailouts. The use of structured tools can provide targeted support to industries and companies that have been severely affected by the outbreak. Since April, the People’s Bank of China has been creating new structural monetary policy tools along the above two logical lines. Key areas and weak links in the economy have added technological innovation, inclusive pensions, support for the development and use of coal, and enhanced energy storage re-loans; the relief has added special re-loans for logistics and civil aviation.

What is the impact of refinancing instruments? A starting point for credit growth and a new channel for liquidity investment.

1) The starting point of credit growth. The People’s Bank of China recently mentioned that the 1 trillion yuan of new credit driven by re-lending may be mainly driven by re-lending to support small and rural agriculture, two carbon reduction tools, and re-lending of technological innovation. In addition, according to the investment direction of “key areas of the national economy + bailout”, the People’s Bank of China will most likely create new re-lending tools this year, such as special re-lending for major manufacturing industries, re-lending to support agricultural production, oil, natural gas and other industries to ensure supply Loans and re-lending to bail out industries such as retail and tourism.

2) How do structural monetary policy tools underpin the economy? If the possible new re-lending tools are included, the structural monetary policy tools are expected to drive financial institutions to provide nearly 1.5 trillion yuan in loans, which will be of great help to the steady growth of credit this year. Constrained by the epidemic in the short term, policies may be difficult to implement. Once the epidemic cools down, structural monetary policy tools will quickly and effectively help stabilize growth.

3) A new channel for liquidity investment. In addition to driving the demand for credit in the real economy, the impact of structural monetary policy tools on the banking system has become increasingly apparent. First, with the use of structural tools, the central bank has invested a large amount of reserves, making the inter-bank market liquidity abundant; second, as a tool for targeted support, the central bank is more flexible in the adjustment of structural tools.

4) The direction of re-lending may also be an opportunity after the bottom of the equity market.

Here is the body part:

On April 26, in an interview with the Financial Times on the current financial market situation, the relevant person in charge of the People’s Bank of China said: “The People’s Bank of China will increase the support of the prudent monetary policy to the real economy, especially to support industries and small and medium-sized enterprises seriously affected by the epidemic. Micro-enterprises and individual industrial and commercial households, support agricultural production and increase energy supply and supply, launch re-loans for technological innovation and special re-loans for inclusive pensions, increase 100 billion yuan in re-loans to support coal development and use and enhance energy storage, increase support for agriculture and small businesses Re-lending and special re-lending for civil aviation will maintain a reasonable and sufficient liquidity, promote the healthy and stable development of the financial market, and create a favorable monetary and financial environment.”[1] It can be seen that re-lending is still the focus of the current monetary policy. In addition to increasing the re-loan quota for small-scale farmers, promoting scientific and technological innovation and special re-loans for inclusive pensions, two new re-loans were added to support the development and use of coal and enhance energy storage and civil aviation. In this article, we sort out and interpret the structural monetary policy tools of re-lending.

1. How to understand structural monetary policy tools? The central bank has targeted support for commercial banks to lend to related industries

The so-called structural monetary policy tools refer to re-lending and re-discounting tools, mainly including re-discounts that have been implemented, re-lending to support small and medium-sized farmers, carbon emission reduction support tools, and technological innovation re-lending in the process of creation, inclusive pensions. Special re-loans, re-loans for the logistics industry and special re-loans for civil aviation, etc. It can be seen from the structural tools whose specific details have been clarified that each tool has different preferential interest rates, issuing objects and usage quotas, and the central bank will set relevant details according to the characteristics of each industry.

However, these structural tools still have something in common, that is, the mechanism of “lending first and then borrowing”. The People’s Bank of China innovated the “credit first and then debit” reimbursement model for small and medium-sized loans since 2018. Since 2020, the investment of re-loan funds has been managed by the reimbursement model of “loan first and then borrow”. Compared with the traditional “borrow first and then loan” model, the “lending first and then borrowing” model moves the loan approval threshold forward, enabling precise drip irrigation in key areas. At the same time, the People’s Bank of China requires banks to establish electronic ledgers to track and monitor the use of funds to prevent funds from “running away”. We understand that this model further enhances the directness and precision of the central bank’s monetary policy.

Taking the support of small and micro enterprises as an example, the People’s Bank of China created a medium-term lending facility (TMLF) tool at the end of 2018. However, after the epidemic, the TMLF tool has been withdrawn in an orderly manner, and the policy goal of directional support for small and micro enterprises has been fully undertaken by the re-lending tool to support small and micro enterprises. We understand that compared with TMLF, the advantages of supporting small and re-lending mainly lie in: (1) the reimbursement model of “lending first and then borrowing” enables the central bank to have a stronger control over the entire support tool; (2) due to its stronger control, the central bank Lower interest rate support is available (85BP lower than MLF VS 15BP lower than MLF).

In simple terms, the principle of structural monetary policy tools is that if commercial banks extend credit to specific industries in accordance with the requirements of the central bank, they will receive low-cost reserve “reimbursement”, which is especially important for small banks.

2. Clarify the context of the creation of structural monetary policy tools

The implementation of traditional monetary policy requires transmission among the various participating entities. Under such a system chain, the central bank plays the role of providing the ultimate liquidity for the banking system. The banking system meets the needs of the real economy for credit expansion based on its own capital and risk appetite. This means that some key directions of policy support, such as green, small and micro enterprises (inclusive), and manufacturing may face the situation of insufficient financial resources. Therefore, we understand that the main role of structural monetary policy tools is to guide the flow of financial resources to the key areas and weak links of national economic development. Under this logic chain, we have seen the establishment of re-lending to support small and rural areas, support tools for carbon emission reduction, and re-lending of technological innovation.

The recent domestic epidemic has added another layer of logic to structural monetary policy tools: bailouts. The use of structured tools can provide targeted support to industries and companies that have been severely affected by the outbreak. On April 6, the executive meeting of the State Council proposed bailouts for special hardship industries such as catering, retail, tourism, civil aviation, and road, water, and rail transportation. We have seen that the People’s Bank of China has recently established re-loans in the logistics sector and special re-loans for civil aviation.

We have seen that since April, the People’s Bank of China has been creating new structural monetary policy tools along the above two logical lines. Key areas and weak links in the economy have added technological innovation, inclusive pensions, support for the development and use of coal, and enhanced energy storage re-loans; the relief has added special re-loans for logistics and civil aviation.

3. The Impact of Structural Monetary Policy Tools: The Key to Credit Growth and the New Channel for Liquidity Investment

(1) Various types of re-lending are expected to become the starting point for credit growth

Recently, the People’s Bank of China and the State Administration of Foreign Exchange issued the “Notice on Doing a Good Job in Financial Services for Epidemic Prevention and Control and Economic and Social Development”. 23 policy measures to strengthen financial services and increase support for the real economy. Among them, the content of structural monetary policy tools is to “increase support for structural monetary policy tools such as re-lending, make good use of re-lending to support agriculture and small businesses and two carbon reduction tools, and speed up 100 billion yuan of re-lending in the field of transportation and logistics. , creating 200 billion yuan in technological innovation re-loans and 40 billion yuan in inclusive pension re-loans, which is expected to drive an additional 1 trillion yuan in loans from financial institutions. ”[2]

We can make a split based on the current information. The above-mentioned 1 trillion yuan of new credit may be mainly driven by 300 billion yuan in re-loans for small farmers, 500 billion yuan in two carbon reduction tools, and 200 billion yuan in scientific and technological innovation re-loans. Of course, according to our understanding, the People’s Bank of China will most likely create new re-lending tools this year, such as special re-lending for major manufacturing industries, re-lending to support agricultural production, oil, natural gas and other industries with guaranteed supply, and bailouts for retail, tourism and other industries. Refinance . If the possible new re-lending tools are included, we believe that structural monetary policy tools are expected to drive financial institutions’ loan issuance to nearly 1.5 trillion yuan, which will be of great help to the steady growth of credit this year. Of course, due to the constraints of the epidemic in the short term, the policy may be difficult to implement. Once the epidemic cools down, structural monetary policy tools will quickly and effectively help stabilize growth.

(2) Structural tools have become an important channel for the central bank to release liquidity

In addition to driving the demand for credit in the real economy, the impact of structural monetary policy tools on the banking system has become increasingly apparent. First, with the use of structural tools, the central bank has invested a large amount of reserves, making the inter-bank market liquidity abundant; second, as a tool for targeted support, the central bank is more flexible in the adjustment of structural tools.

After 2014, the People’s Bank of China changed the way of placing reserves, and the claims on the banking system became the “anchor” for the expansion of the balance sheet of the People’s Bank of China. Before the epidemic, MLF was the main tool for the People’s Bank of China to increase its claims on the banking system, so changes in the amount of MLF had a significant impact on the liquidity of the inter-bank market. However, it can be observed that since the epidemic (the end of December 2019), the total size of the balance sheet of the People’s Bank of China has increased by about 2.5 trillion yuan, and the structural monetary policy tools have increased by about 1.4 trillion yuan. In other words, structural monetary policy tools have become the main “anchor” for the expansion of the PBC’s balance sheet since the outbreak.

In the second half of 2021, some market participants calculated the excess reserve ratio based on empirical models, and believed that the money market would experience tight liquidity during certain periods. But in practice, the currency market remained stable during this period. The central bank specifically responded in the form of a column in the monetary policy implementation report for the fourth quarter of 2021: “When analyzing the liquidity situation of the banking system, it is advisable to focus on the overall framework of the central bank’s liquidity management rather than local factors, and some Long-term and short-term influencing factors are simply added to calculate the liquidity surplus and deficiency, let alone the maturity of monetary policy tools as a factor affecting the liquidity of the banking system, and use this to judge the degree of liquidity.”

We understand that what the central bank wants to describe is the problem that the traditional calculation of excess reserve ratio will underestimate the liquidity adequacy between banks. The general way to measure the excess reserve ratio is to only consider changes in the medium-term lending facility (MLF), cash, government bond issuance, and open market operations maturities. This method ignores the structural monetary policy tool that has had the greatest impact on the monetary system since the epidemic, which means that the calculation of the excess reserve ratio lacks the provision of reserves brought about by the use of structural monetary policy tools. In this case, the money market interest rate is the most accurate indicator to observe the liquidity of the interbank market.

Regarding the currency control mechanism, the central bank has stated: “Improve the money supply control mechanism , form a long-term mechanism for the central bank to adjust the liquidity , capital and interest rate constraints of bank money creation, enhance the stability of the growth of total credit, maintain the balance of money supply and The growth rate of social financing scale basically matches the nominal economic growth rate.”

We understand that this long-term mechanism should refer to the normalized and large-scale use of structural monetary policy tools.

From the perspective of the currency credit system, banks usually face the above three constraints when creating money: liquidity (the central bank’s deposit reserve ratio requirement), capital (own capital), and interest rates (the financing needs of the real economy). The well-known aggregate monetary policy tools (reduction of reserve ratio and interest rate) are actually relaxing the constraints on banks when they create money. For example, the RRR cut actually reduces banks’ demand for reserves, thereby relaxing their liquidity constraints. However, when the structural problems in the economy are prominent, the effectiveness of the aggregate monetary policy will be greatly reduced, and the structural policy will help to loosen the banks in a targeted manner.

Under the operation mode of “lending first and then borrowing”, structural monetary policy tools can be targeted to provide liquidity support to banks that actually lend to industries encouraged by the policy. For example, after the epidemic, with the increase in the use of re-lending for small banks, the liquidity support obtained by small banks from the central bank has increased simultaneously.

With the successive creation and expansion of various re-lending instruments, when the amount of reserves generated by re-lending in the banking system is large enough, there may even be a situation where “re-lending to replace MLF” reduces costs for banks. In this case, the policy necessity of reducing the reserve ratio for banks to reduce costs will also decrease, and the central bank can reserve policy space for subsequent reserve reduction.

In addition, structural monetary policy tools can achieve a situation in which the demand for financing is boosted by targeted reductions in lending rates in certain industries. The creation of deposits by bank loans requires the coordination of loan demand, which is largely constrained by loan interest rates in addition to being affected by real economic conditions. Under the original aggregate policy, the central bank could only guide banks to lower loan interest rates by lowering the policy interest rate to increase loan demand. However, under the current system, medium and long-term policy interest rates such as MLF are often linked to the potential growth rate of my country’s economy, and the signal of a reduction is too strong. Structural monetary policy tools can solve the problem of financing needs in a targeted manner. For example, in the process of using carbon emission reduction support tools, the central bank will require commercial banks to issue loans in accordance with the LPR of the same period, and targeted commercial banks will be required to lower the carbon emission reduction requirements that meet the requirements. Loan interest rates. At present, structural monetary policy tools will play an increasingly important role in monetary policy.

As mentioned above, re-lending tools are aimed at key areas of the national economy and industries that need policy relief due to the impact of the epidemic. The industries in which re-lending is invested may also be investment opportunities after the equity market bottoms out.

risk warning

(1) The creation of structural monetary policy is less than expected

(2) Economic fundamentals declined more than expected

This article is reprinted from: https://news.futunn.com/post/14937960?src=3&report_type=market&report_id=204199&futusource=news_headline_list
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