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2.7 The Monetary Policy Targeted Eased, and Financing Costs Remained High

In 2014, under the premise of adhering to the “total amount control, structural adjustment” through measures such as targeted reserve requirement ratio (RRR) cuts and loan and deposit benchmark interest rate cuts and enlarging the rising ceiling of deposit interest rates, the Central Bank of China implemented a prudent monetary policy.[1] The annual broad money (M2) balance was 122.84 trillion yuan, indicating a growth of 12.2 %,[2] a decrease of 1.4 % from the previous year

Fig. 2.17 Total amounts of newly increased social financing and year-on-year changes in M2 balance (Data source: CEIC)

(Fig. 2.17). M2 newly increased by 12.18 trillion yuan, a decrease of 1.05 trillion yuan from the previous year. The narrow money (M1) balance grew by 3.2 %, a decrease of 6.1 % from the previous year. Currency in circulation (M0) grew by

2.9 %, a decrease of 4.3 percentage points from the previous year.

In 2014, the scale of social financing was 16.46 trillion yuan, 859.8 billion yuan less than the previous year (Fig. 2.17).[3] The newly increased RMB loans amounted to 9.78 trillion yuan, an increase of 890 billion yuan over the previous year, accounting for 59.4 % of the scale of social financing for the same period, 8.1 % higher than the previous year. From the newly increased RMB loans, 66 % was used to finance nonfinancial companies and other departments,[4] and 28 % was used to finance the real estate sector. In 2014, the general loan-weighted average interest rate of financial institutions on nonfinancial institutions and other departments was as high as around 7 %.

In order to stabilize investment in 2015, monetary policy should cut the interest rates and continue the measures of targeted RRR cuts. The central bank should maintain a modest currency devaluation.

  • [1] In the first half of 2014, the central bank implemented the targeted RRR cuts twice. By creating medium-term lending facilities (MLF) and pledged supplementary lending (PSL) and using other tools, the central bank guided financial institutions to raise their credit availability in some fields such as agriculture, small microenterprises, and shantytown transformation. Since the second half, the central bank reduced the base point of positive repo rate four times, to 60 points; cut the benchmark interest rate for loans and deposits by 40 and 25 base points, respectively, in late November; and expanded the upper limit of deposit interest rates to 1.2 times of the benchmark interest rate
  • [2] By the end of 2014, the M2 balance reached 122.84 trillion yuan, about twice the GDP at the beginning of year
  • [3] In 2014, the regulators' supervision of service specification restrained the expansion of commercial banks' off-balance sheet business and restricted the expansion of the social financing scale. Trust loans accounted for 3.1 % of total social financing, a decrease of 7.5 % over the previous year
  • [4] By the end of 2014, the loan balance of small microenterprises was 15.46 trillion yuan, an increase of 15.5 % from the previous year. The growth rate was 1.3 % higher than the previous year; this was 6.1 % and 4.8 % higher than that of largeand medium-sized enterprise, respectively, the previous year
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