At the press conference held by the State Council Information Office (SCIO) at 9 a.m. on Tuesday, September 24, 2024, Pan Gongsheng, Governor of the People’s Bank of China (PBOC), Li Yunze, Minister of the National Financial Regulatory Administration (NFRA), and Wu Qing, Chairman of the China Securities Regulatory Commission (CSRC), briefed on the progress of providing financial support for high-quality economic development, and answered questions from the press. The transcript is as follows.
Shou Xiaoli, Director-General of the Press Bureau of the SCIO and SCIO spokesperson: Good morning, ladies and gentlemen. Welcome to the SCIO press conference. Today we are glad to have PBOC Governor Pan Gongsheng, NFRA Minister Li Yunze, and CSRC Chairman Wu Qing at the conference. They will give introductions to their work on providing financial support for high-quality economic development and answer your questions. Now, I’ll give the floor to Mr. Pan Gongsheng.
Pan Gongsheng, Governor of the PBOC: Thank you, Director-General Shou. Good morning, dear friends from the media! Glad to see you again. I want to thank you all for your long-standing attention and support regarding the financial sector reform and development and the work of the PBOC.
Since the beginning of this year, the PBOC has been committed to the fundamental objective of providing financial services for the real economy, adhered to a supportive monetary policy stance and policy orientation, and made major monetary policy adjustments three times respectively in February, May, and July.
In terms of the aggregates of monetary policy, the PBOC has adopted a variety of monetary policy tools, such as cutting the required reserve ratio (RRR) and policy rates, and bringing down the loan prime rate (LPR), to help create a favorable monetary and financial environment.
Concerning the structure of monetary policy, the PBOC, with a focus on key links of high-quality development, has launched the central bank lending for sci-tech innovation and technological transformation in an effort to enhance financial support for sci-tech innovation and equipment upgrading and renovation. In addition, we have lowered the down payment ratio for housing mortgages, the mortgage rates, and the interest rates on personal housing provident fund loans. We have also set up the central bank lending facility for affordable housing to accelerate the destocking of housing inventory in a market-oriented manner.
Regarding the transmission of monetary policy, we have improved the accounting method of the quarterly value-added of the financial sector, which has been adjusted from reckoning based on the growth of deposits and loans to an income-based approach. We have rectified the behavior of luring depositors with manual interest subsidy, reduced and prevented the idle circulation of funds within the financial system, activated existing financial resources that are inefficiently occupied, and enhanced the efficiency of fund use, thus improving the efficiency of monetary policy transmission.
As for exchange rates, we let the market play a decisive role in the formation of exchange rates. We have maintained the flexibility of the exchange rate while strengthening guidance of expectations, and kept the RMB exchange rate basically stable at an adaptive and equilibrium level.
The monetary policies have continuously delivered results. At end-August, the aggregate financing to the real economy (AFRE) registered a year-on-year growth of 8.1 percent, and RMB loans increased by 8.5 percent year on year, about 4 percentage points higher than the nominal GDP growth rate. Besides, financing costs were at historically low levels.
In line with the decisions and arrangements made by the Communist Party of China (CPC) Central Committee and to further support stable economic growth, the PBOC will firmly adhere to a supportive monetary policy stance, intensify monetary policy adjustments, and implement more targeted adjustment measures, thereby fostering a favorable monetary and financial environment for the stable growth and high-quality development of the economy.
At today’s press conference, I would like to announce several polices.
The first is to lower the RRR and policy rates, and thus bring down the benchmark market rates. The second is to cut interest rates on existing home loans and unify the minimum down payment ratio. The third is to launch new monetary policy tools to support stable development of the stock market.
First, we will cut the RRR and policy rates. We will lower the RRR by 0.5 percentage points, injecting approximately RMB1 trillion of long-term liquidity into the market in the days to come. We may further cut the RRR by 0.25 to 0.5 percentage points within the year, depending on liquidity conditions in the market. As for the central bank policy rates, we will lower the 7-day reverse repo rate by 0.2 percentage points from the current 1.7 percent to 1.5 percent. Meanwhile, we will bring down both the LPR and deposit rates, and thus keep net interest margins (NIMs) of commercial banks stable.
Second, we will cut interest rates on existing home loans and unify the minimum down payment ratio for personal housing loans. To achieve that, we will guide commercial banks to lower the interest rate on existing home loans to a level close to that on newly issued loans, with an anticipated average decline of approximately 0.5 percentage points. We will unify the minimum down payment ratio for first- and second-home mortgages, with the nationwide minimum down payment ratio for second homes to be reduced from 25 percent to 15 percent. As for the RMB300 billion of central bank lending facility for affordable housing launched by the PBOC in May, the proportion of its funding support for banks and purchasing entities will be raised from the original 60 percent to 100 percent, so as to enhance market-oriented incentives for them. Together with the NFRA, we will extend the term of policies on commercial property loans and the “16-Point Plan”, which are set to expire by the end of this year, until the end of 2026.
Third, we will launch new monetary policy tools to support stable development of the stock market. One is to establish a swap facility for securities, fund and insurance companies to support eligible institutions in obtaining liquidity from the central bank by pledging their assets. This facility will significantly enhance these institutions’ ability to raise funds and increase stock holdings. The other is to launch a special central bank lending to guide banks to provide loans to listed companies and their major shareholders for buying back shares and increasing stock holdings.
For the above-mentioned policy measures, we will release policy documents or announcements item by item on the PBOC’s official website.
This is my brief introduction. Next, I am glad to answer your questions together with Minister Li Yunze and Chairman Wu Qing. Thank you!
CCTV: We know that so far this year, the PBOC has carried out three major adjustments of monetary policy. As Governor Pan just mentioned, there will be further reductions of the RRRs and the policy rates. People are widely concerned about the policies on aggregates as they will play an important role in stabilizing growth. So would you explain these policies in more detail? Thank you.
Pan Gongsheng: Aggregates in monetary policy have been of great concern both to the public and in the market. As I have said on different occasions, the PBOC will adhere to a supportive monetary policy stance by stepping up monetary policy adjustments and enhancing their precision. We have used a mix of monetary policy tools to support stable growth of the real economy. While working on the adjustments to monetary policy tools, the PBOC has taken account of the following factors in particular. The first is to support the stable growth of the Chinese economy. The second is to push for a mild rebound in prices, an important factor to consider in developing monetary policy tools. The third is to strike a proper balance between providing support for the growth of the real economy and maintaining the soundness of the banking sector. The fourth has to do with the exchange rate, that is, to keep the RMB exchange rate basically stable at an adaptive and equilibrium level. In addition, we have attached importance to the coordination of monetary and fiscal policies so as to support the proactive fiscal policy playing its part more effectively.
Regarding the specific adjustments to macro policies and the policies on monetary aggregates, which I talked about in my opening remarks, here are some more details.
First, let’s look at RRR reductions. Having lowered the RRR by 0.5 percentage points this February, the PBOC is to carry out another RRR reduction of 0.5 percentage points, which will provide approximately RMB1 trillion of long-term liquidity to the financial market. Currently, the weighted average RRR for financial institutions stands at 7 percent. Following the adjustment, it will be lowered from 8.5 percent to 8 percent for large banks and from 6.5 percent to 6 percent for medium-sized banks, with the RRR for rural financial institutions remaining at 5 percent, which has been in place for some years. With the implementation of the RRR reduction policy, China’s average RRR for the banking sector will be around 6.6 percent, still having room compared with the central banks of the other major economies of the world. Since there are three months to go before the end of the year, it is likely we will further lower the RRR by 0.25-0.5 percentage points based on changing circumstances.
Second, turning to policy rate cuts, in July, we lowered the 7-day reverse repo rate for open market operations (OMOs), the PBOC’s main policy rate, from 1.8 percent to 1.7 percent. This time, it will be reduced by 20 basis points from 1.7 percent to 1.5 percent. With the functioning of the market-oriented mechanism for interest rate regulation, the policy rate adjustment will lead to adjustments of benchmark market rates. As a result, the medium-term lending facility (MLF) rate is expected to go down by about 0.3 percentage points, while the LPR and deposit rates will decline by 0.2-0.25 percentage points.
Overall, this interest rate adjustment will have a neutral influence on the NIMs of banks. Although cutting the interest rates on existing home loans will affect the interest revenue of banks, it will reduce the demand of customers for advance repayment of loans. An RRR cut by the central bank is equivalent to direct provision of low-cost, long-term funds for banks. MLF operations and OMOs are the main channels through which the PBOC provides commercial banks with short- and medium-term funds, so that interest rate cuts will also reduce the funding costs for banks. What’s more, as I mentioned just now, the LPR and deposit rates are also expected to see corresponding decreases. The re-pricing effect achieved through our previous efforts on guiding deposit rates downward via the self-regulatory mechanism for interest rates will materialize in a cumulative manner.
In formulating the plan for the policy adjustment, the PBOC team has conducted several rounds of careful, quantitative analysis and assessment, which show this interest rate adjustment will have a neutral influence on bank profits and the NIMs of banks will remain basically stable. Thank you.
Reuters: Despite the implementation of multiple policies aimed at attracting home buyers and alleviating the loan burdens of homeowners, housing prices in China continue to decline. In some cities, overall housing prices have experienced double-digit decreases. To this end, do China’s financial regulators believe that the time has come to introduce new monetary policies? Thank you.
Pan Gongsheng: Thank you for your question. It’s a very good question and a prevalent concern of the society. We provide support in diminishing risks and fostering healthy development for the real estate market mainly from a financial standpoint, pursuant to our responsibilities. In recent years, the PBOC has refined macro-prudential financial policies for the real estate sector. We have adopted an integrated approach to address both the supply and demand. Key measures include reducing the minimum down payment ratio several times for personal housing loans, lowering lending rates, removing the policy floor for mortgage rates, and setting up a central bank lending facility for affordable housing to facilitate the purchase of existing residential properties. To implement the decisions and arrangements made by the CPC Central Committee on promoting the stable and sound development of the real estate market, the PBOC, in collaboration with the NFRA, is about to introduce five new policies regarding the real estate finance.
The first policy is to encourage banks to reduce the interest rates on existing mortgage loans. In August last year, the PBOC urged commercial banks to implement these reductions in an orderly manner, yielding relatively positive results. Previously, mortgage loans were adjusted with reference to the LPR, with a uniform policy floor applied across the country. However, under the new mortgage policy launched on May 17 this year, the floor has been removed. As a result, the interest rates on new mortgage loans have been further reduced relative to the LPR. This significant decline has further widened the interest rate spreads between the new and the existing mortgage loans, particularly in major cities such as Beijing, Shanghai, Shenzhen, and Guangzhou. In this context, the PBOC will guide banks to conduct batch adjustments to the interest rate on existing mortgage loans, lowering it to a level close to the newly issued. We anticipate the average reduction to be approximately 0.5 percentage points. We use the term “average” because loans are issued during various time frames, and the interest rates on existing mortgage loans vary across issuing periods, regions, and banks. This is why I say the rate of decline is an average number.
Banks reducing the interest rates on existing mortgage loans can significantly lower the interest expenses for borrowers. We anticipate that this policy will benefit approximately 50 million households and 150 million individuals, leading to an average annual decrease in interest expenses of around RMB150 billion for households. This reduction is expected to stimulate consumption and investment, while also contributing to the decrease in prepayment. Furthermore, it will help compress the space for illicit refinancing of existing mortgages, thereby safeguarding the legitimate rights and interests of financial consumers and contributing to the stable and healthy development of the real estate market.
This document will be officially released soon. Given numerous borrowers involved, banks need some time to make necessary technical preparations. Moving forward, we are also considering guiding commercial banks to enhance the pricing mechanism for mortgage loans. This will allow both banks and customers to make dynamic adjustments through independent negotiations based on market-oriented principles.
The second policy is that a minimum down payment ratio of 15 percent now applies to both first- and second-home loans. In order to better support the rigid demand for housing and the needs to improve living conditions of urban and rural residents, at the national level, second-home buyers will no longer be discriminated from first-home buyers when applying for residential housing loans, with the minimum down payment ratio of 15 percent applying to both types of buyers. On May 17, the minimum down payment ratio for first-home buyers was lowered to 15 percent, while that for second-home buyers stayed at 25 percent, and from now onwards, the two will share the same ratio of 15 percent. I would like to specifically mention two points. Firstly, the local authorities may adopt city-specific policies, independently choosing to differentiate or not the first- and second-home buyers, thus setting the minimum down payment ratio within their jurisdictions. Since China is a large country, the real estate markets of different cities and regions vary greatly, so local governments may adopt differential policies to determine the minimum down payment ratio within their jurisdictions based on the floor set at the national level. Secondly, commercial banks may negotiate the specific down payment ratio with their clients, according to the risk profile and willingness of the clients. Since 15 percent is the floor for the down payment ratio, commercial banks may ask for a higher down payment after evaluating the risk of the clients. Or the client may be wealthy enough to offer a 30 percent down payment on the house. It depends on the market-based negotiation between commercial banks and individuals.
The third policy is to extend the period of two policy measures on real estate financing. Previously, the PBOC and NFRA launched together the “16-Point Plan” and policies on commercial property loans, which have played positive roles in promoting the stable and healthy development of the real estate market and in defusing risks in the market. Among them, some temporary measures, such as the rollover of outstanding loans of property developers and commercial property loans should expire on December 31, 2024, according to previous policy design. We have made the decision together with the NFRA this time to extend the two policies from December 31, 2024 to December 31, 2026.
The fourth policy is to improve the central bank lending for affordable housing. On May 17, the PBOC launched the central bank lending for affordable housing with a size of RMB300 billion. We guided financial institutions to support local state-owned enterprises to purchase those completed yet unsold housing at a reasonable price based on market principles and the rule of law. The purchased properties shall then be resold or rented as affordable housing. It was an important measure to reduce the housing inventory. To further enhance market-based incentives for banks and the acquiring entities, we have increased the proportion of funds provided by the PBOC from 60 percent to 100 percent for the facility. For example, previously the PBOC was to provide RMB6 billion for a RMB10 billion loan granted by a commercial bank, whereas now the PBOC will provide low-cost funding in full amount, to speed up sales of commodity housing stock.
The fifth policy is to support the purchase of property developers’ land inventory. Apart from spending the proceeds of some local government special bonds on buying the land reserves, we are studying on allowing policy banks and commercial banks to lend to qualified enterprises to acquire the land inventory of property developers based on market principles. It is to activate the inventory of land and ease financial strains of the property developers. When necessary, the PBOC may provide support through central bank lending. We are studying the policy together with the NFRA.
Thank you!
Market News International: Does the Federal Reserve’s 50 bps rate cut this month leave more room for further monetary policy easing in China? How does the PBOC evaluate the impact of the Fed’s rate cut on China’s foreign exchange market? Thank you.
Pan Gongsheng: Thank you for your questions. Recently, major economies have adjusted their monetary policy stance. We can see that the depreciation pressure of RMB has significantly been alleviated, and RMB has turned to appreciation. On September 18, the Federal Reserve cut rates by 50 bps, which was the first cut after its rate hike in the past couple of years. Meanwhile, other central banks also kicked off their easing cycle. For example, the European Central Bank has lowered the rates twice since June this year by 50 bps in total. The Bank of England cut the bank rate by 25 bps in August. The Bank of Canada and the Sveriges Riksbank also turned to rate cut. Except for the Bank of Japan, most major economies have started to cut rates. The momentum of US dollar appreciation has weakened, with the US dollar Index retreated on the whole. Since the beginning of August, the US dollar Index fell by 3 percent, which is now hovering at around 101. With the convergence of domestic and overseas monetary policy cycles, the external pressure for the RMB exchange rate to remain basically stable has largely been reduced. On September 23, the RMB was trading roughly at 7.05 against the US dollar, appreciating 2.4 percent since August.
Since the exchange rate is a relative value of one currency to another, it will be influenced by various factors, such as the economic growth, monetary policy, financial markets, geopolitics, unexpected risk events. All these factors may impact the exchange rate.
From the external point of view, the external environment and the path of US dollar movement are still uncertain because of geopolitical movements like the diverging economic development of different countries and the US presidential election, as well as the volatile global financial market.
Given the domestic developments, we believe there is a solid foundation for the RMB exchange rate to remain stable.
First, from a macro perspective, the momentum of economic recovery will be further consolidated and strengthened. The strong monetary policies launched by the PBOC will help support the real economy, promote consumer spending, and boost market confidence.
Second, the balance of payments remains broadly stable. In the first half of the year, the current account surplus was 1.1 percent of GDP, which remained within a reasonable range.
Third, the PBOC and the State Administration of Foreign Exchange (SAFE) attach great importance to the development of the foreign exchange market. Market participants have become more mature, trading behaviors have been more rational, and market resilience has significantly improved. In the first half of this year, the proportion of import and export companies hedging exchange rate risks reached 27 percent, and the proportion of cross-border trade in goods settled in RMB registered 30 percent. These two figures do not overlap. Therefore, if we add the two figures, we can conclude that around 50 percent of companies are not that vulnerable to exchange rate risks in foreign trade. As the PBOC has communicated to the market on several occasions, in the context of two-way fluctuations in the RMB exchange rate, market participants should treat exchange rate volatility rationally, adopt the philosophy of risk neutrality, and refrain from “betting on exchange rate directions” or “betting on unilateral development”. Enterprises should focus on their main businesses, and financial institutions should continue to serve the real economy well.
The PBOC’s stance on exchange rate policy is clear and transparent. The key points are as follows: first, we adhere to the decisive role of the market in exchange rate formation and maintain the elasticity of exchange rate; second, we need to strengthen expectation management to prevent the formation of a one-sided and self-fulfilling expectation in the foreign exchange market, guard against the risk of exchange rate overshooting, and keep the RMB exchange rate basically stable at an adaptive and equilibrium level.
Thank you!
CNBC Reporter: Analysts believe that the decline in Chinese government bond yields is partly due to market expectations of slower economic growth and an accommodative monetary policy stance. What is the PBOC’s response to this? What measures will be taken? Thank you.
Pan Gongsheng: The discussion on this topic has cooled down recently, though there was a lot of hype earlier. The PBOC has communicated with the market in an appropriate manner for multiple times. The earlier decline in Chinese government bond yields was due to several factors. For instance, the PBOC guided market interest rates to move down through policy rates, and the .government bond issuance was relatively slow in the early period. Besides, small and medium-sized financial institutions lacked risk awareness and swarmed to the market, creating the effect of herd flock and exacerbating the situation. Driven by the market, China’s current long-term government bond yield hovers around 2.1 percent. The PBOC respects the role of the market. Undoubtedly, this has created a favorable monetary environment for China to implement proactive fiscal policy.
However, it should be noted that interest rate risk is an important part of risk management of financial institutions. The case of Silicon Valley Bank in the United States is highly instructive as a risk event. As we are all aware, it reminds us that central banks need to observe and assess market risks from a macro-prudential management perspective and take appropriate measures to mitigate and prevent the accumulation of risks. This is an important mandate of central banks.
Currently, as an important price signal, the government bond yield curve still has flaws such as insufficient long-end pricing and lack of stability. The PBOC has issued risk warnings regarding long-term government bond yields and has strengthened communication with the market to prevent the potential systemic risk of a one-sided decline in long-term government bond yields incurred by the effect of herd flock.
Maintaining trading order in the bond market is also a mandate of central banks. Recently, the PBOC has identified violations in the bond market such as price manipulation, account lending, and tunneling. We will step up efforts to crack down on violations in the interbank bond market and keep the public updated on the developments. The National Association of Financial Market Institutional Investors (NAFMII) have already informed the public of several cases under investigation. Once the investigations are completed, we will make an announcement to the public.
In recent years, as financial markets develop rapidly in China, the bond market have gradually expanded and deepened. The conditions for the central bank to purchase and sell government bonds as a way of injecting base money through the secondary market have been basically satisfied. I elaborated on our corresponding plan at the Lujiazui Forum on June 19. Currently, the PBOC has incorporated the purchasing and selling of government bonds into the monetary policy toolkit and begun to implement the instrument. Our operations are highly transparent, the information of which are available to the public on our official websites. We are also working with the Ministry of Finance to study on improving the issuance pace, maturity structure, and custody system of government bonds. The purchase and sale of government bonds by the PBOC in the secondary market will be progressive.
Thank you!
Financial News reporter: What are the main considerations for launching securities fund insurance swap facility and special central bank lending for listed companies and major shareholders to buy back shares and raise holdings? How will the PBOC conduct these operations? Thank you.
Pan Gongsheng: Thank you for your questions. In order to maintain stability of China’s capital market and boost investor confidence, the PBOC, based on the international experiences and our own practices, has aligned with the CSRC and the NFRA and launched two structural monetary policy tools to support stable development of the capital market. This is also the first time that PBOC has innovated structural monetary policy tools to support the capital market.
The first tool is a swap facility for securities, fund, and insurance companies. This facility supports eligible securities, fund and insurance companies, as determined by the CSRC and NFRA under specific regulations, in swapping their holdings of bonds, stock ETFs, and constituent stocks of the CSI 300 Index as collateral for high-liquidity assets like government bonds and central bank bills from the PBOC. Government bonds and central bank bills differ significantly from other assets held by market institutions in terms of credit rating and liquidity. Many assets held by institutions currently suffer from poor liquidity due to prevailing market conditions. By swapping these assets with the PBOC, market institutions can obtain higher-quality, more liquid assets, which will greatly improve their ability to raise funds and increase stock holdings. We plan to launch this swap facility at an initial scale of RMB500 billion, which may be expanded in the future based on market developments. As I said with Chairman Wu Qing, as long as the initial RMB500 billion works well, a second RMB500 billion could follow, and potentially even a third RMB500 billion. I believe this is possible, and our attitude remains open. The funds obtained under this facility can only be used for investing in the stock market.
The second tool is central bank lending to support buybacks and holdings increase. This tool directs commercial banks to provide loans to listed companies and their major shareholders, specifically for buying back and raising holdings of the shares of the listed companies. In fact, it is a common practice in international capital markets for shareholders and listed companies to buy back shares and increase holdings. The PBOC will provide central bank lending to commercial banks in full amount, at an interest rate of 1.75 percent. The interest rate on loans provided by commercial banks to their customers is around 2.25 percent, which means a 0.5 percentage points increase. Given the current conditions, the 2.25 percent interest rate is also very low. The initial quota is RMB300 billion. If the tool works well, as I have discussed with Chairman Wu Qing, another RMB300 billion or even a third RMB300 billion could be provided. However, we need to assess the market conditions and make evaluations going forward. This tool is applicable to listed companies of different ownership, including state-owned enterprises, private enterprises, and mixed-ownership enterprises. We make no distinction between different ownership. The PBOC will closely cooperate with the CSRC and the NFRA, while cooperation from market institutions is also essential to successfully carry out this work.
Thank you all!
Shou Xiaoli: Thanks to our three speakers, and also thanks to our friends from the media for your participation. This is the end of today’s press conference.