In 2023, the financial system will implement a prudent monetary policy with precision and strength, further increase support for the real economy, steadily advance financial reform, continue to deepen opening-up, the financial industry as a whole is sound, the financial market is running smoothly, and the financial work has made new progress and new achievements.

Monetary policy is precise and effective

In 2023, China's financial institutions will strengthen credit support for the real economy, and the total credit will grow steadily and rapidly. By the end of 2023, the balance of RMB loans reached 237.6 trillion yuan, an increase of 10.6% year-on-year, and an increase of 22.7 trillion yuan for the whole year, an increase of 1.3 trillion yuan year-on-year.

The credit structure continued to improve. As of the end of 2023, the balance of small and micro loans of Pratt & Whitney increased by 23.5% year-on-year, and the growth rate of loans to "specialized and special new" and technology smes was 18.6% and 21.9%, respectively. The balance of medium and long-term loans to the manufacturing industry increased by 31.9% year-on-year, of which the growth rate of medium and long-term loans to the high-tech manufacturing industry reached 34%.

"In the past year, we strengthened counter-cyclical adjustment in a timely manner, cut the required reserve ratio twice and the policy interest rate twice, guided the orderly reduction of the interest rate on outstanding mortgages, and guided financial institutions to keep the total amount of credit at an appropriate and steady pace. Pan Gongsheng, Governor of the People's Bank of China, said that in 2024, a variety of monetary policy tools will be comprehensively used to maintain reasonable and abundant liquidity, so that the scale of social financing and money supply can match the expected targets of economic growth and price levels. We will maintain a balanced supply of new credit at the right pace and increase the stability of credit growth. In terms of structure, we will continue to optimize the credit structure, increase financial support for private enterprises, small and micro enterprises, and improve the quality and effectiveness of financial services to the real economy.

China's monetary policy still has enough room. "At present, the average level of the statutory reserve ratio is 7.4%, which is relatively large compared with the central banks of major economies in the world. This is an effective tool to supplement the medium - and long-term liquidity of the banking system." Pan Gongsheng said that we will continue to use liquidity tools such as the deposit reserve ratio, re-lending and rediscount, medium-term lending facility and open market operations to provide strong support for the rational growth of total social financing and money and credit.

Recently, the People's Bank of China announced that it decided to reduce the deposit reserve ratio of financial institutions by 0.5 percentage points from February 5, 2024 (excluding financial institutions that have implemented the 5% deposit reserve ratio), and after this reduction, the weighted average deposit reserve ratio of financial institutions is about 7%.

"The RRR cut is necessary and urgent at this time. Although there are more signs that the domestic economy is picking up speed and many economic indicators are picking up, the recovery is not very stable." Dong Ximiao, chief researcher of Zhaolian, said that at this time, a relatively large reduction in the reserve ratio sends a clear policy signal to the market, which helps to boost the confidence of business subjects and investors, and better support the recovery of the economy.

Financing costs have dropped significantly

In 2023, the People's Bank of China implemented a series of interest rate policies to promote a significant decline in social comprehensive financing costs.

The deputy governor of the People's Bank of China Xuan Changneng introduced that one is to reduce the policy interest rate twice. In June and August 2023, the open market reverse repo and medium-term lending facility tender rates decreased by a total of 0.2 and 0.25 percentage points respectively, driving the loan market quotation rates to continue to decline. Second, we will adjust and optimize housing credit policies. Continue to implement the dynamic adjustment mechanism of the first set of mortgage interest rate policy, and cut the lower limit of the second set of mortgage interest rate by 40 basis points at the end of August 2023, guiding banks to reduce the stock of first set of mortgage interest rates. Third, we will further liberalize deposit interest rates. On the basis of the rapid growth of household savings deposits and the obvious decline in lending interest rates, major banks have cut deposit interest rates three times, and the medium - and long-term deposit interest rates have dropped even more.

The cost of corporate financing and consumer credit has gone down significantly. In 2023, the weighted average interest rate of corporate loans will be 3.88%, down 0.29 percentage points year-on-year, and continue to hit a new low since statistics began. Interest rates on more than 23 trillion yuan of outstanding mortgages have been cut, with an average reduction of 0.73 percentage points, reducing the annual interest payments of mortgage borrowers by about 170 billion yuan. The overall downward level of interest rates effectively reduces the interest burden of enterprises and residents, helps stimulate loan demand, optimize the allocation of financial resources, and better smooth the domestic economic cycle.

On January 24, the People's Bank of China also released news that it lowered the interest rate of agricultural reloan, small reloan and rediscount by 0.25 percentage points each. Dong Ximiao believes that these measures will guide banks to further reduce lending rates and promote a steady decline in social financing costs.

We will continue to deepen financial opening-up

Financial opening up is an important impetus for the reform and development of Chinese financial industry. In recent years, more than 50 opening-up measures have been launched in the financial sector, continuously expanding the breadth and depth of financial opening-up. At present, 24 global systemic central banks outside China have branches in the mainland, and half of the 40 largest insurance companies outside China have entered the mainland.

Industry insiders believe that the in-depth participation of foreign institutions in the mainland financial market plays an important role in promoting economic development and unblocking the domestic and international double cycle.

As China's economy continues to recover and the institutional opening of the bond market steadily expands, the investment value and hedge property of RMB bonds are more prominent, and foreign capital continues to be optimistic about China's bond market.

As of the end of December 2023, foreign investors have been net buyers of Chinese bonds for 11 consecutive months, and the cumulative net purchase volume in 2023 exceeds 1.5 trillion yuan. A total of 1,124 foreign institutions, covering more than 70 countries and regions, have entered China's bond market, holding 3.72 trillion yuan of Chinese bonds, an increase of 340% compared with before the launch of the Bond Connect.

"In recent years, the People's Bank of China, in conjunction with the mainland's financial authorities, has launched and continuously improved arrangements such as the Shanghai-Shenzhen-Hong Kong Stock Connect, Bond Connect, cross-border wealth Management Connect and Swap Connect, which have provided a lot of convenience for overseas investors to allocate mainland stocks and bonds through Hong Kong and for Hong Kong citizens to purchase mainland wealth management products." Pan Gongsheng said.

On January 24, the Hong Kong Monetary Authority announced that the RMB Treasury bonds and policy financial bonds under the northbound cooperation of the "Bond Connect" will be included in the list of eligible collateral for the RMB liquidity arrangement. In the view of Xue Hongli, general manager of the financial markets department of Shanghai Pudong Development Bank, the new measures enrich the channels for overseas institutions to invest in domestic RMB bonds under the "Bond Connect", which is of great significance for promoting the liquidity of RMB bonds and increasing the attraction of the domestic bond market for foreign investors.

In the next step, the People's Bank of China will adhere to the overall planning of financial opening and security, actively study and explore more application scenarios for RMB bond collateral, and steadily expand the institutional opening of China's bond market rules, regulations, management, and standards.

Source: Chinese government website