China will maintain a prudent monetary policy while keeping it flexible this year to ensure reasonably adequate liquidity, and it will strengthen adjustments to support economic growth, the People's Bank of China, the central bank, said in a statement on Sunday.
This year, growth in the broad money supply, credit and aggregate financing of the real economy should be in line with nominal GDP growth, and market-oriented reform of the interest rate system will continue to improve the transmission mechanism of the loan prime rate, which is the new lending rate benchmark, the statement said.
"The market will play a decisive role in the formation of the RMB exchange rate, which will be kept basically stable at a reasonable level and at equilibrium," said the statement, which was issued after the bank's annual meeting in Beijing on Thursday and Friday.
The bank highlighted seven major tasks for 2020, including using monetary policy tools, such as a targeted reserve requirement ratio cut, re-lending and re-discounting to reduce financing costs and supporting financing for small and micro enterprises.
The central bank cut the reserve requirement ratio — the proportion of cash that must be kept in reserve at commercial banks — by 0.5 percentage points on Monday, a move that's expected to inject about 800 billion yuan ($114.9 billion) into the financial system. In 2019, the central bank reduced the ratio requirement three times to counter economic slowdown risks.
Given the backdrop of moderate domestic economic growth and external uncertainties, some economists said monetary policy may tend toward relatively easing but with limited room. The government has a target to balance short-term growth stability and long-term financial safety.
In light of headwinds countering growth, Lu Ting, chief economist at Nomura Securities, said the central bank can be expected to deliver another reserve ratio cut of 0.5 percentage points in the second quarter, when the country's consumer inflation will likely pass its peak.
"The markets may turn much more optimistic about China's growth prospects, but we recommend caution on the economic impact of the reserve ratio cut due to Beijing's new policy thinking of moderate easing that excludes the property sector," he said.
The PBOC will promote credit financing for small and private companies, it said in its statement. Last year, it increased large commercial banks' loans for small and micro companies by more than 30 percent, leading to a drop in lending costs of 1 percentage point. "These targets have been over-fulfilled," it said.
The central bank is aiming this year to "win the battle of preventing and reducing large financial risks" and reiterated its role as "the lender of last resort", which means the it will provide money to financial institutions that are experiencing financial difficulty to prevent their collapse. Last year, financial regulators took over Baoshang Bank in the Inner Mongolia autonomous region and provided liquidity to prevent the spread of financial risks.
To support liquidity and improve commercial bank's asset quality, the PBOC will supplement commercial banks' capital in 2020 through issuance of perpetual bonds — a credit instrument having no date to pay back.
Other risk-control measures will be taken for internet and real estate financing, and a macro-prudential regulatory system will be built to supervise cross-border capital flows, according to the central bank.
Regulatory control over monetary policy operations is expected to continue to strengthen in China. "Monetary easing, if any, is expected to be limited and should not translate into relaxed regulatory control over the riskier types of leverage, which is positive to system stability," said Rowena Chang, associate director of Non-Banks Asia Pacific at Fitch Ratings, an international rating agency.