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E-mail China.org.cn, February 28, 2025
China Business News:
In recent years, interest rates have continued to decline and are currently at relatively low levels. The central bank has emphasized improving the transmission and implementation of interest rate policies and expanding policy space. What considerations are there for the next phase? Thank you.
Xuan Changneng:
I will answer this question. The interest rate system in China can be divided into three levels: The first level is the central bank's policy rate, which is currently the seven-day reverse repo rate for open market operations. When people talk about interest rate cuts, they're typically referring to a reduction in this rate. The second level consists of market benchmark rates. As Mr. Zou noted earlier, the treasury bond yield curve is a crucial component of these benchmark rates, serving as a key pricing reference for both the bond market and many other financial assets. The third level consists of market rates such as deposit and lending rates, which reflect the ultimate impact of lower financing costs. In recent years, the influence of policy rates as a guiding tool has become more apparent. Last year, the policy rate fell by 0.3 percentage point, guiding the one-year loan prime rate down by 0.35 percentage point and the five-year-plus loan prime rate down by 0.6 percentage point. This led to an even larger decline in lending rates. To achieve the goal of reducing overall social financing costs, we will take holistic approaches to expand the space for interest rate policies.
First, we will strengthen the execution of interest rate policies. Last year, the PBC cracked down on illegal "manual interest supplementation" practices used to attract high-rate deposits. It also improved self-regulation of interest rates for corporate and interbank demand deposits, maintaining market order and helping banks reduce overall social financing costs. This year, we will strengthen these efforts to further reduce banks' overall liability costs and ease pressure on net interest margins. This will help balance banks' balance sheet health with lower financing costs for the real economy.
Second, we will ensure a good balance between internal and external factors. The yuan exchange rate's stability is backed by solid fundamentals. As mentioned earlier, we will implement multiple measures to prevent exchange rate overshooting risks amid changes in the external environment. We aim to maintain the yuan's basic stability at reasonable and balanced levels, establishing a foundation for adjustments based on domestic economic and financial conditions.
Third, we will accelerate the replenishment of bank capital. The MOF recently clarified it will support major commercial banks' capital reinforcement through special treasury bond issuance. Local government special bonds also serve as a key channel for strengthening small and medium-sized banks' capital, demonstrating the coordination between fiscal and monetary policies. Everyone knows that capital is the foundation for banks to support economic growth, drive structural reforms and manage risks. When the government takes measures to supplement bank capital, it enhances banks' ability to operate prudently, effectively serve the real economy and resist risks. To some extent, this also helps offset the impact of lower financing costs in the real economy on banks' internal capital generation.
Thank you.
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