By Wang Xinchuan
The development of the current financial situation is changing the corresponding intensity and rhythm of central bank's monetary control. The monetary policy should continue to attach great importance to "maintaining reasonable market fluidity"; also, close attention should also be paid to the possible impact of the expected change on the commodity price in the future. Generally, this year's prudent monetary policy will remain neutral, and sustained effort will be made to make the policy more forward-looking, targeted, and effective.
The Spring Festival of the Year of the Snake has been a dividing line of the central bank's fluidity control. Earlier, from June 26, 2012 to February 7, 2013, the central bank had carried out reverse repurchases for a streak of 35 weeks, with a total volume of more than RMB 7.3 trillion Yuan; after the Spring Festival, the central bank's public market operations became 3 repurchases in a row, totaling at RMB 55 billion Yuan.
From reverse repurchase that puts capital into circulation, to repurchase that withdraw capital from the market, does it mean that the central bank is beginning to tighten up the monetary policy? What kind of environment is the current monetary control in? What kind of operation principle should monetary control follows this year?
On February 19, the central bank, after 8 months, restarted repurchase operation, ending the one-way fluidity release in the open market. According to statistics, a net amount of RMB 910 billion Yuan was withdrawn from circulation last week, and the trend of net withdrawal may continue this week. The main reasons are that large amount of cash has been put into circulation after the Spring Festival and that the added amount of funds outstanding for foreign exchange may have increased considerably, resulting in rather relax capital supply. The central bank's conducting timely repurchases can dynamically regulate market fluidly, and thus provide powerful support to the development of the real economy and effectively reduce expectation for inflation.
Therefore, the central bank's repurchase operations should be regarded as normal fluidity management after the festival, rather than the beginning of policy tightening. In terms of the tendered interest rate of these three repurchases, the 28-day rate and 91-day rate was 2.75 percent and 3.05 percent respectively, the same as that before the suspension of repurchase on June 26 last year and markedly lower than the rate of pledge-style repo of the same period, indicating that the central bank has no apparent intention to rein in long-term fluidity and that the repurchases should not be interpreted as signal for policy tightening.
It should be noted that there are concerns about future policy tightening in the market.
Internationally, the pace of global economic recovery has been slow, some economies are in serious debt, "tight finance and easy currency" is becoming the long-term policy of developed economies, and China is still facing financial and trade challenges. Domestically, in January this year, export growth hit a record high for the past 21 months, the volume of social finance and new loans increased forcefully, month-on-month PPI rebounded, and consumption grew rapidly thanks to the Spring Festival. These statistics indicate that the economy is recovering mildly.
On the other hand, in January, CPI went up 1 percent month on month, up 2 percent compared with the same period of last year, indicting pressure of rising commodity price; housing sales rebounded, and individual house loans and real estate development loans continued to increase at a more rapid pace, raising concerns in investors that loose fluidity may boost house price and inflation. Besides, according to central bank's statistics, as of the end of January, balance of broad money supply (M2) was 99.21 trillion Yuan, up 15.9 percent compared with the same period of last year. The numbers have given rise to ongoing discussion in the market about "currency over-issuing" and inflation. Although there are many differences between China's currency creation mechanism and that of developed countries and the idea of "currency over-issuing" should be regarded dialectically, due attention should be paid to the rather ease of fluidity.
The development of the current financial situation is changing the corresponding intensity and rhythm of central bank's monetary control. At present, the monetary policy should continue to attach great importance to "maintaining reasonable market fluidity"; also, close attention should also be paid to the possible impact of the expected change on the commodity price in the future. Generally, this year's prudent monetary policy will remain neutral, and sustained effort will be made to make the policy more forward-looking, targeted, and effective.
In the use of monetary policy instruments, the central bank will, based on the supply-demand relations of international balance and payment and fluidity, use public market operations, deposit reserve rate, re-lending, rediscount, and other proper innovative fluidity management tools to guide the stable operation of market interest rate. As it is reflected in open market operations, the central bank may carry out repurchase and reverse repurchase alternatively to conduct precise regulation and ensure the stability of market fluidity, providing a stable monetary environment for the development of the real economy.
