A moderately accommodative monetary policy provides sustained momentum for China's economic growth

Editor's note: The article, written by Yuan Song who is a researcher at the School of Economics at Zhejiang University, reflects the author's opinions and not necessarily the views of CGTN. 

On March 20, China's one-year loan prime rate (LPR), a market-based benchmark lending rate, came in at 3.1 percent. The LPR has remained unchanged for the fifth consecutive month. The net interest margin of commercial banks is at a historically low level, and the accommodative monetary and financial environment remains unchanged. Since the Central Economic Work Conference in December last year, the Chinese government has emphasized in several important meetings and reports that a moderately accommodative monetary policy will be implemented in 2025. The shift in China's monetary policy from "prudent" to "moderately accommodative" aligns with the current economic development needs and also helps provide sustained momentum to achieve economic growth targets.

Implementing an accommodative monetary policy is practically necessary

First, China's current economy still faces challenges such as insufficient effective demand. Although China successfully achieved the 5% economic growth target in 2024, some businesses, especially private enterprises, are facing numerous challenges, including reduced orders, rising labor costs, and difficulties in cash flow. Implementing a moderately accommodative monetary policy, such as lowering the reserve requirement ratio (RRR) and interest rates, helps reduce financing costs and burdens for businesses and individuals, stimulates credit demand, and unleashes the investment and consumption potential of economic entities.

Second, from an external perspective, global economic recovery remains weak. Developed economies such as the US and Europe have started to shift their monetary policies and have initiated a global trend of accommodative monetary policies. In response to the trend of global accommodative monetary policies, China's monetary policy must also make corresponding adjustments. It should send clear policy signals to the market, guiding expectations of future monetary policy trends, thus addressing the "imported inflation" caused by external accommodative monetary policies.

Third, accommodative monetary policy is an effective macroeconomic tool to drive economic recovery. For example, over the past year, in order to stabilize the real estate market and invigorate consumer market activity, the central bank and other departments have implemented a series of measures, such as lowering the reserve requirement ratio (RRR) and adjusting existing mortgage interest rates. The effects of these policies have gradually become apparent.

Implementing an accommodative monetary policy involves the following key implications and requirements

First of all, in terms of monetary aggregate policies, it is important to focus on achieving the "moderate" requirement. A suitably moderate interest rate cut can stimulate market financing demand and economic activity, driving the recovery of growth and inflation expectations. However, if the interest rates are set too low, it may lead to negative effects such as "resource misallocation" and a shift away from the real economy ("financialization"). Excessive interest rate and reserve requirement ratio cuts, detached from China's economic situation, could actually harm the prospects for economic growth.

Secondly, the timing of RRR cuts and interest rate reductions should be flexibly managed. Currently, China still faces many internal and external challenges and uncertainties in its economic recovery. Therefore, policies should be implemented based on domestic and international economic and financial conditions, as well as the functioning of financial markets. For example, interest rates and RRR could be adjusted when economic data is weak or when market sentiment is more pessimistic. This would ensure that policy resources are used at the right time to address future uncertainties.

Thirdly, in terms of policy structure, there should be both increases and reductions. On the expansion side, structural monetary policy tools should be fully utilized to guide more financial resources toward major strategies and key areas, such as technological innovation, green transformation, private enterprises, rural revitalization, and other critical sectors and weak links. Efforts should focus on boosting consumption, stabilizing foreign trade, and other key areas, continuously optimizing financial products, and increasing financial support. On the reduction side, greater emphasis should be placed on revitalizing underutilized existing financial resources, preventing capital idling, and further improving the efficiency of fund utilization.

Fourthly, a combination of various structural policy tools should be used in a coordinated manner. The "degree" of a moderately accommodative monetary policy requires not only interest rate cuts and reserve requirement ratio (RRR) cuts but also the parallel use of multiple policy tools. New liquidity adjustment tools, existing structural tools, and traditional measures like interest rate and RRR cuts work together to guide and incentivize financial resources, promoting stable economic growth and optimizing structural transformation.

Overall, implementing a moderately accommodative monetary policy will strengthen the continuity and effectiveness of policies. It is beneficial for stabilizing expectations, increasing investor confidence, enhancing consumer willingness, and further stimulating the initiative and dynamism of economic entities, thereby providing sustained momentum for China's economic growth.