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CF40 Working Paper: Research on the Effectiveness of China’s Structural Monetary Policy

Apr 17-2023   



The latest CF40 working paper, co-authored by NSD professors and Ph.D. students, combs through China’s structural monetary policy (SMP) and gives rough estimates of its scale, then zooms in on targeted reduction of required reserve ratios to analyze if bank loans have flowed to targeted areas, evaluates the effectiveness of such policy, and sets out proposals for China’s future SMP.

 

CF4, or China Finance 40 Forum, is a think-tank committed to policy research and exchanges on economy and finance. The authors of the working paper are: Prof. Huang Yiping, Chairman of CF40 Academic Committee, Deputy Dean of NSD, and Director of PKU Institute of Digital Finance (IDF); Shen Yan, CF40 guest member, Deputy Director of IDF; Chen Danxu and Chen Xinyu, both NSD doctoral candidates.

 

The paper notes that 2014 marked the People’s Bank of China’s first use of SMP, at that time to support small and medium-sized enterprises (SMES). The guarded attitude concerning SMP’s scope and duration has since given way to it becoming a major policy tool and achievement of the central bank. According to the paper, by the end of 2022, SMP loans had amounted to 17.9% of the monetary base in a narrow sense and 27.9% in a wider one.

 

By nature, SMP loans are policy credits, whose costs must be incurred by the central bank or commercial banks. That largely explains why most central banks tend to deploy SMP for contingencies and crises.

 

The merit of SMP needs to be gauged on its effectiveness and sustainability. The paper finds that targeted cuts to required reserve ratios in 2019 and 2020 didn’t evidently lead to an increase in loans to SMES. Though their average non-performing loan (NPL) ratios remained relatively stable, commercial banks still wrote off over one trillion yuan of bad loans each year between 2020 and 2022. Such a jump in NPL was due to a number of factors, but various policies, including SMP, adopted during the pandemic to facilitate loaning to SMES can hardly be neglected.

 

The authors believe that under specific circumstances and for specific purposes, SMP is a useful innovation. However, when it reaches one fourth of monetary base, meticulous research should be conducted to evaluate if it is successful or not. The primary mission of monetary policy should not be ignored, nor should the evaluation of the effectiveness of SMP. In addition, the authors advise a cautious attitude toward the scale of SMP and the installation of a clear exit strategy right at its launch.

CF40 Working Paper: Research on the Effectiveness of China’s Structural Monetary Policy

Apr 17-2023   



The latest CF40 working paper, co-authored by NSD professors and Ph.D. students, combs through China’s structural monetary policy (SMP) and gives rough estimates of its scale, then zooms in on targeted reduction of required reserve ratios to analyze if bank loans have flowed to targeted areas, evaluates the effectiveness of such policy, and sets out proposals for China’s future SMP.

 

CF4, or China Finance 40 Forum, is a think-tank committed to policy research and exchanges on economy and finance. The authors of the working paper are: Prof. Huang Yiping, Chairman of CF40 Academic Committee, Deputy Dean of NSD, and Director of PKU Institute of Digital Finance (IDF); Shen Yan, CF40 guest member, Deputy Director of IDF; Chen Danxu and Chen Xinyu, both NSD doctoral candidates.

 

The paper notes that 2014 marked the People’s Bank of China’s first use of SMP, at that time to support small and medium-sized enterprises (SMES). The guarded attitude concerning SMP’s scope and duration has since given way to it becoming a major policy tool and achievement of the central bank. According to the paper, by the end of 2022, SMP loans had amounted to 17.9% of the monetary base in a narrow sense and 27.9% in a wider one.

 

By nature, SMP loans are policy credits, whose costs must be incurred by the central bank or commercial banks. That largely explains why most central banks tend to deploy SMP for contingencies and crises.

 

The merit of SMP needs to be gauged on its effectiveness and sustainability. The paper finds that targeted cuts to required reserve ratios in 2019 and 2020 didn’t evidently lead to an increase in loans to SMES. Though their average non-performing loan (NPL) ratios remained relatively stable, commercial banks still wrote off over one trillion yuan of bad loans each year between 2020 and 2022. Such a jump in NPL was due to a number of factors, but various policies, including SMP, adopted during the pandemic to facilitate loaning to SMES can hardly be neglected.

 

The authors believe that under specific circumstances and for specific purposes, SMP is a useful innovation. However, when it reaches one fourth of monetary base, meticulous research should be conducted to evaluate if it is successful or not. The primary mission of monetary policy should not be ignored, nor should the evaluation of the effectiveness of SMP. In addition, the authors advise a cautious attitude toward the scale of SMP and the installation of a clear exit strategy right at its launch.