Sheng Songcheng published an article in the People's Daily: How to Understand Structural "Interest Rate Cuts"?

Sheng Songcheng published an article in the People's Daily: How to Understand Structural "Interest Rate Cuts"?

At a press conference held by the State Council Information Office on January 15, the People's Bank of China announced incremental policy measures to support the high-quality development of the real economy through monetary and financial policies, including structural "interest rate cuts" and the expansion of targeted tools as the core, guiding financial institutions to reduce financing costs for key areas of the real economy. The central bank's reduction of the interest rates on structural monetary policy tools is significantly different from typical interest rate cuts, but it is more precise and suitable for the policy support needed in the current economic situation.

China's structural monetary policy tools are instruments used by the central bank to guide the credit direction of financial institutions, playing a role in precise drip irrigation and leveraging effects. By providing relending or funding incentives, these tools support financial institutions in increasing credit allocation to specific fields and industries, promoting a reduction in corporate financing costs. On one hand, structural monetary policy tools link central bank funds with financial institutions' credit allocation to specific fields and industries; on the other hand, they also have a certain function of basic currency injection.

China's permanent structural monetary policy tools include relending for agriculture and small enterprises, and rediscounting. The central bank announced the establishment of relending for private enterprises under the relending for agriculture and small enterprises, with a quota of 1 trillion yuan, guiding local legal financial institutions to strengthen support for private small and micro enterprises. Supporting technological innovation and green transformation is also a key area for the use of China's structural monetary policy tools. The central bank increased the relending quota for technological innovation and technological transformation by 400 billion yuan to 1.2 trillion yuan, and included private small and medium-sized enterprises with high levels of R&D investment in the policy support areas, reflecting a clear policy orientation to support green development and technological innovation.

According to traditional theory and practices in various countries, monetary policy is fundamentally a tool for aggregate control. However, for a long time in China, monetary policy has mostly been a combination of aggregate control and structural control. Especially in recent years, China's structural monetary policy tools have continuously innovated and played an important role, serving as an effective means to support weak links and key areas of the economy and promote high-quality economic development.

In the application of structural monetary policy tools, we generally pay more attention to their incentive effects on specific fields. This includes both "quantity" injections and "price" incentives. In the past, we guided bank credit allocation direction more through adjusting quotas from the "quantity" aspect, while recently, the reduction of interest rates on structural monetary policy tools mainly strengthens the incentives for financial institutions to support key areas and weak links from the "price" aspect.

China's economic development still faces many old problems and new challenges, which require structural policies to play a role. On one hand, fiscal policy can directly intervene in economic activities to promote structural adjustments; on the other hand, structural monetary policy, by increasing incentives for commercial banks, also helps enhance the effectiveness of fiscal policy implementation, plays a role in policy integration, and stimulates endogenous economic growth momentum.

It is worth noting that the central bank provides low-cost funds to commercial banks through structural monetary policy tools, which is essentially the central bank "giving profits" to commercial banks, rather than generally guiding market interest rates down, and these two are fundamentally different Currently, the net interest margin of commercial banks remains at historically low levels. The financial sector needs to strike a balance between supporting the real economy and maintaining its own health, which is also one of the considerations for the central bank's decision to lower the interest rates of structural monetary policy tools. As for how the decrease in the interest rates of structural monetary policy tools transmits to terminal rates, it mainly depends on the market supply and demand relationship. Monetary policy is often "effective but limited," generally playing an indirect role, and its implementation effects are significantly influenced by market feedback, including the cooperation of enterprises, households, commercial banks, and the entire financial system.

With the monetary policy toolbox becoming increasingly rich, the central bank can more effectively smooth out short-term market fluctuations, and "small steps" in monetary policy have become a norm. Of course, in cases where there is a significant liquidity gap, measures such as reserve requirement ratio cuts and interest rate reductions still need to be supported. Considering the synergy between monetary policy and fiscal policy, as well as the limited elasticity of consumption and investment interest rates in our country, the adaptability of reserve requirement ratio cuts may be better than interest rate reductions. The internal and external constraints faced by monetary policy in the future are expected to further ease, and there is still room for reserve requirement ratio cuts and interest rate reductions in our country, but it is necessary to wait for more favorable timing. (The author is a professor at China Europe International Business School and the director of the China Chief Economist Forum Research Institute.)■

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