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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