Central bank vows to keep monetary policy consistent

China's central bank is expected to keep its monetary policy consistent and supportive of economic recovery, taking advantage of various tools to sustain adequate liquidity and avoid premature tightening, experts said on Wednesday.

The current interest rate level is unlikely to rise remarkably after the New Year's holiday, with short-term market rates staying around the policy rates, they said. The experts predicted that the monetary authorities will not accelerate the end of accommodative monetary policies even as China looks forward to strong growth in 2021.

Experts said such signals can be seen from a quarterly policy meeting of the People's Bank of China, the central bank. Meeting participants decided to maintain necessary support for economic recovery and further use the relending and rediscount facilities as well as monetary policy tools to directly finance the real economy, according to a statement released by the central bank late on Tuesday.

The meeting, held by the PBOC's monetary policy committee and chaired by Yi Gang, the central bank governor, also urged further strengthening of financial support for technology innovation, small and micro enterprises and green development. It also confirmed the extension of two special mechanisms that allow delayed repayments of loans for small and medium-sized enterprises and preferential interest rates for loans.

In January, the PBOC is expected to use various monetary policy tools to inject more funds into the financial system to prevent a shortage of liquidity, especially through open market operations. But it is less likely to lower the reserve requirement ratio－the proportion of financial institutions' cash that must remain in reserve in the central bank, said Yang Yewei, an analyst at Guosheng Securities.

The monetary authorities declared in the fourth quarter's policy meeting that China's shifting of the benchmark lending rate toward the prime loan rate has been completed for outstanding loans with floating interest rates. As a result, the efficiency of the monetary policy transmission mechanism has been improved and the lending rates have dropped remarkably.

In the coming months, the PBOC will continue to "release the potential of reform measures" and "consolidate the results of the decline in the actual lending rates", the meeting's statement said. It also pledged to guide financial institutions to increase medium and long-term loans for manufacturing.

Maintaining basic tone

Ming Ming, a senior analyst at CITIC Securities, said that the PBOC is maintaining the basic tone of its monetary policy, which is flexible, targeted, reasonable and adaptive. "At the beginning of 2021, the liquidity situation will have a big impact on the market. And we should also pay close attention to the amount of government bonds issued, which will influence credit growth," he said.

At present, banks' excess reserves are at a relatively high level, which will ensure the central bank has space for additional policy accommodation, said Ming.

China's consumer price index, a main gauge of inflation, decreased by 0.5 percent in November from a year earlier, hitting the lowest level in more than a decade. The last time the country's CPI entered negative territory was in October 2009.

"With inflation low and the recovery, especially of private demand, still relatively fragile, it's important to maintain accommodative policies and to avoid premature tightening," said Sebastian Eckardt, lead economist for China at the World Bank.

Experts said prudent monetary policy should be better coordinated with proactive fiscal policy next year to spur economic growth.

Xu Sheng, a researcher at the China Academy of Macroeconomic Research, said that based on his research, proactive fiscal policy this year would contribute 1.57 percentage points of GDP growth, and the contribution may increase to 1.88 percentage points in 2021.

Xu, who suggested maintaining a sustainable and stable fiscal policy next year, expected the year-on-year fiscal spending growth rate to likely be about 8 percent, making it an adaptive growth rate, while total fiscal revenue may exceed 20 trillion yuan ($3.06 trillion).

Economists said that China still has fiscal space, especially at the central government level, but the government needs to rein in fiscal imbalances and improve fiscal sustainability.