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In recent years, many universities in Hong Kong have made significant progress in global rankings, including the University of Hong Kong, the Hong Kong University of Science and Technology, the Chinese University of Hong Kong, and Lingnan University. The University of Hong Kong is one of the oldest and most prestigious universities in Hong Kong. With its excellent teaching and research results, as well as extensive international cooperation, the University of Hong Kong has always been ranked among the top in international rankings. The Hong Kong University of Science and Technology has also made significant progress in rankings in recent years. It focuses on cultivating innovative talents and has achieved groundbreaking research results in science, engineering, business management and other fields. The Chinese University of Hong Kong is highly praised for its diversified disciplines and excellent research results. In international rankings, the Chinese University of Hong Kong also main

Understand Economic Report Released by Chinese Government - Key Financial Terms Unit 2

To understand the mechanism of the Chinese Economy and the reports released by the Chinese government, this series is particularly designed for all readers who are willing to learn more about the Chinese economy, identify risks and opportunities of markets in China, study and research for your course about China, enhance your knowledge for a future career, and obtain the important signal of China. This series will present key financial terms that you must know before reading any official documents released by the Chinese government.


Two-pillar supervision (双支柱监管)


The "dual pillar" refers to the dual pillar regulatory framework of monetary policy and macro-prudential policy. Before the 2008 financial crisis, the policy framework of the mainstream central banks took monetary policy as the core, and stabilizing prices was the policy goal.


However, the 2008 international financial crisis showed that price stability did not represent financial stability, and a single monetary policy was not enough to maintain the stability of the financial system. The main sources of financial system risk were financial pro-cyclicality and cross-market risk contagion, Macroprudence is to cure the problem of financial pro-cyclicality and cross-market risk contagion. The monetary policy mainly regulates the economic cycle, while macro-prudential policy mainly regulates the financial cycle.


The establishment of a two-pillar regulatory framework can play two roles: one is to maintain the stability of the currency; The second is to maintain the stability of the financial system.




Interest rate corridor (利率走廊)


The interest rate corridor refers to the regulation method that the central bank that stabilizes the market lending rate by providing a deposit and loan facility mechanism to commercial banks and other financial institutions, thus relying on the set interest rate operating range. The interest rate corridor assumes that commercial banks pursue profit maximization and maintain the balance of account settlement funds within a certain period of time.




The current framework of China's interest rate corridor mechanism is to take the Standing Lending Facility (SLF) interest rate as the upper limit, the open market reverse repurchase rate as the first lower limit, and the excess reserve rate as the bottom limit of the capital interest rate, and regulate the operation of the market interest rate in the desired range through the open market operation.


By setting and changing its own deposit and loan rates, the central bank makes the inter-bank interest rate fluctuate between the deposit and loan rates of the central bank, gradually close to the target interest rate, and finally realizes the regulation and control of the market interest rate. In the interest rate corridor, the central bank can achieve the effect of guiding the market interest rate back to the target level in the way of adjusting the range. The expected management and interest inducement are more significant, reducing the frequent operating costs, and the regulation effect is better.


Under the liquidity shortage of the banking system, the operating interest rate of the reverse repo is the first lower limit of the capital interest rate; Under the liquidity surplus of the banking system, the interest rate of excess reserves is the bottom limit of the capital interest rate. Before 2018, the central bank took the initiative to create a shortage of the overall liquidity of the banking system.


If the market interest rate is higher than the policy interest rate, the central bank can effectively transmit the base money to other banks or non-bank financial institutions in the inter-bank market, thus realizing the transmission of monetary policy; If the market interest rate is lower than the policy interest rate if the bank continues to lend funds in the inter-bank market, it needs to bear the interest loss of the difference between the capital interest rate and the policy interest rate.


Therefore, the policy interest rate becomes the first bottom constraint under the interest rate corridor mechanism. With the continuous quantitative easing since the second quarter of 2018, the current liquidity of the banking system has turned into a surplus, and the lower limit of the capital interest rate has also changed from the policy interest rate to the excess reserve rate.




Countercyclical regulation (逆周期调控)


Counter-cyclical regulation is a kind of macro-prudential policy. The central bank carries out flexible counter-cyclical regulation on the basis of objectively and accurately judging the macro situation. Through the counter-cyclical capital buffer, it realizes the organic combination of total regulation and prevention of financial risks. The purpose of countercyclical regulation is to flatten the business cycle and reduce excessive fluctuations in the economy.


The counter-cyclical supervision theory believes that cyclicality will lead to the accumulation of risks in a large number of loans by commercial banks during the economic upturn, boost the economic foam, and cause a credit crunch during the economic downturn, thus expanding the volatility of the macro-economy at different stages of the economic cycle, and ultimately exacerbating the risk of the financial system. To achieve the policy objective of countercyclical adjustment, we need to strengthen the coordinated use of fiscal, monetary, credit, and industrial policy tools.








Hope you enjoy the learning! For more information, please click the label "China Financial Key Terms" on the left bar to see the whole series.


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