Forward-looking approach needed for banking liquidity

The State Council, China's Cabinet, said in a recent executive meeting that the country will timely and flexibly make use of re-lending and other monetary policy tools to increase support for the real economy.

China's monetary policy has become more targeted and precise in recent years, and such policy tools as re-lending and rediscount have gradually become an important channel of basic money supply, increasing financing support for key areas and weak links. For example, the State Council has proposed to increase re-lending to agriculture and small and micro businesses, and set up two special re-loans for scientific and technological innovation and elderly care services, to which the central bank will provide 60 percent and 100 percent re-loans based on their loan principal respectively.

Such structural monetary policy tools can guide financial institutions to optimize their credit structure and increase support for key areas and weak links. The low-cost and long-term funds provided by the central bank through re-lending can not only reduce the financing cost of enterprises, but also effectively disperse bank risks.

That the latest State Council executive meeting proposed to "study and adopt financial support for consumption and effective investment measures, improve the level of financial services for new citizens, and optimize the financial services of affordable housing", shows that the country is attaching importance to new problems and challenges.

The country must emphasize sustainability to stabilize expectations. Since the beginning of this year, the central bank has implemented a "seamless" transition between the two monetary policy tools aimed at directly helping the real economy. This will help stabilize market players' expectations. At the same time, on the basis of making good use of such tools as re-financing, the authorities should take comprehensive measures to support coordinated regional development and guide financial institutions to increase support for small and micro businesses, scientific and technological innovation and green development.

The country needs to take a forward-looking approach to exercise more targeted adjustments to monetary liquidity to ensure ample liquidity in the banking system. The central bank should continue to improve the long-term mechanism of adjusting money supply liquidity and interest rates to ensure broad money growth matches nominal economic and social financing growth.