Journalist: The COVID-19 pandemic has taken a heavy toll on the global and Chinese economy, as evidenced by the year-on-year 6.8 percent decline of China’s GDP in Q1. What do you think of the current international and domestic economic situations?

Yi Gang: The COVID-19 pandemic is the most severe global pandemic we have ever experienced since the World War II. It has now affected more than 200 countries and regions across the globe with over 5.4 million confirmed cases, and the spread has not stopped to date. The pandemic has dealt a heavy blow to the global economy, with interruption in the circulation of industry chains and supply chains, contraction in international trade and investment, and surge in unemployment. Notably, the “Great Lockdown” worldwide in response to the pandemic will show its remarkable impact on the global economy in Q2. According to the International Monetary Fund (IMF) and other international organizations, major advanced economies are projected to suffer an unprecedented hit in Q2, and the economic contraction will be probably much worse than that during the 2008 global financial crisis or even the Great Depression in the last century. The global financial market has become less volatile following drastic fluctuations at earlier stages, but the fundamentals remain grim with risks lingering.

In Q1 2020, the COVID-19 pandemic posed a severe impact on China’s economic and social development. GDP witnessed a 6.8 percent decline year on year amid a double-digit fall in investment, consumption and exports. Meanwhile, some enterprises, particularly private enterprises, as well as micro, small and medium-sized enterprises (MSMEs) faced greater challenges in production and operation. Under the strong leadership of the CPC Central Committee with General Secretary Xi Jinping at its core, the country proceeded in confidence and unity, took scientific prevention and control measures and practiced targeted policies. So far, China has delivered significant strategic achievements in coordinating Covid-19 containment and economic and social development, as the order of production and life has been basically restored and economic statistics are taking an upward turn. The official purchasing managers’ index (PMI) for the manufacturing sector was recorded 50.8 in April, marking the second consecutive month for the index to stand above the threshold of 50.

Despite great uncertainties surrounding the overseas pandemic situations and its impact, China’s economy remains highly resilient with a huge domestic market, and the long-term sound economic fundamentals stay unchanged.

Journalist: In response to the pandemic, central banks of major economies in Europe and the US have adopted unconventional quantitative easing policies. China has also taken a series of measures regarding financial macro regulation and monetary policy. How well do these measures work now? What are the basic stance and key considerations of monetary policy at the next stage?

Yi Gang: In order to offset the impact of the pandemic, the People’s Bank of China (PBC), in concert with the Ministry of Finance (MOF) and China Banking and Insurance Regulatory Commission (CBIRC), swiftly launched 30 financial support policy measures on February 1 to step up countercyclical adjustments to aggregates and employ structural monetary policy tools in an innovative way. Since the outbreak of Covid-19, the volume of offsetting policies implemented has reached RMB5.9 trillion, rendering strong support for Covid-19 containment and economic and social development.

In terms of aggregates, we have injected liquidity in more-than-expected amounts via three rounds of cuts in required reserve ratio (RRR), strengthened open market operations and increased central bank lending and central bank discounts, to resolutely support the reopening of China’s financial market on February 3 following the Spring Festival holiday as scheduled, and shore up the confidence of the financial market.

In terms of prices, we have guided the decline in interest rates of reverse repos in open market operations and of medium-term lending facility (MLF) as well as the loan prime rate (LPR). In the meantime, the transition of the pricing benchmark of outstanding floating-rate loans to LPR has been initiated to drive down the interest rates on outstanding loans.

In terms of structure, we have introduced targeted polices according to the situation of the pandemic. Specifically, we have proactively leveraged RMB300 billion worth of special central bank lending at favorable rates, RMB1.5 trillion worth of inclusive central bank lending and central bank discounts and RMB600 billion of additional lending quotas for policy banks, to provide priority support for key manufacturers of medical and daily supplies for Covid-19 containment, as well as heavily-hit MSMEs and enterprises in the service sector.

In terms of policy coordination, we have enhanced the coordination between monetary policy and fiscal policy, industrial policy as well as financial regulatory policy, provided fiscal interest subsidies for manufacturers of important medical and daily supplies for Covid-19 containment, and extended the time limit for MSMEs to repay loan principal and interest in a bid to help them weather the difficult time.

This mix of measures has produced remarkable results. Money and credit have expanded even though most economic indicators witnessed declines. From January to April, RMB loans surged by RMB8.8 trillion, nearly RMB2 trillion more than the increase in the same period last year. Broad money (M2) and the outstanding aggregate financing to the real economy (AFRE) mounted by 11.1 percent and 12 percent year on year respectively, much faster than those of last year, which reflected rigorous countercyclical adjustments. Since the beginning of this year, the financing of MSMEs has realized increase in scale, drop in price and expansion in coverage. At end-April, outstanding inclusive loans issued to micro and small businesses (MSBs) grew by 25.1 percent year on year, two percentage points higher than the growth rate at end-2019. In April, the average interest rate on new inclusive MSB loans stood at 5.24 percent, down 0.77 percentage points from that of last December. At end-April, the number of MSMEs with outstanding loans from financial institutions exceeded 28 million.

At the next stage, we will pursue a sound monetary policy that is more flexible and appropriate, and, in line with the requirements laid out in the Report on the Work of the Government, comprehensively leverage and innovate a variety of monetary policy tools to ensure adequate liquidity at a reasonable level and maintain an accelerated growth of M2 and AFRE from last year.

Journalist: At present, the pandemic imposes heavier pressure on enterprises, especially MSMEs. As is stated in this year’s Report on the Work of the Government, the authorities should develop new monetary policy tools that can directly stimulate the real economy, increase financial support to keep business operations stable, and do their best to help enterprises, particularly MSMEs, and self-employed businesses get through this difficult time. What are the measures taken by the central bank to implement these requirements?

Yi Gang: Since COVID-19 broke out, the PBC has earnestly implemented the decisions and arrangements of the CPC Central Committee and the State Council, developed innovative monetary policy tools and shortened the transmission chain of monetary policy by pursuing a differentiated and precise money and credit policy to “directly stimulate” the financing of enterprises.

First of all, we have launched RMB300 billion special central bank lending for financial institutions to issue loans at favorable rates to key enterprises in the supply chain of medical and daily necessities for pandemic containment. In other words, to secure supplies. As of May 23, nearly RMB280 billion out of the RMB300 billion central bank lending had been used to support banks to issue preferential loans to over 7,000 key enterprises, with an estimated actual financing rate of 1.25 percent after deducting fiscal interest. The special central bank lending followed the rule that special cases should be handled with special approaches and with haste, and played an essential role in the fight against the pandemic and in ensuring sufficient supplies. Prior to issuance there is a set of strict procedures. The issuance process is bound by a record system. Following the issuance there awaits review by audit authorities. Any illicit issuance of loans will be investigated once identified, thus ensuring that the special central bank lending fulfils its special purposes.

Second, we have increased the quota dedicated to central bank lending and central bank discounts by RMB1.5 trillion to step up financial support for the orderly resumption of work and production, poverty alleviation, spring farming and tillage preparation, and poultry and livestock breeding. We have also provided inclusive financing support for MSBs in heavily-hit sectors like tourism and entertainment, accommodation and catering, and transportation. Up to May 21, a total of RMB472 billion of loans (including discounts) out of the quota for special central bank lending and central bank discounts had been granted by financial institutions to 570,000 enterprises (including rural households) at favorable rates. The policy design of the special quota is a market-oriented financial inclusion mechanism. It is a sustainable policy for both banks and enterprises, given that it not only reduces the financing costs for enterprises but also helps small and medium-sized banks balance their budgets.

Third, we have adopted the policy of provisional deferment of loan principal and interest repayments for MSMEs to strengthen support for enterprises, particularly for MSMEs. By April 30, financial institutions had granted approval for deferred repayments of over RMB1.2 trillion MSME loans.

Next, the PBC will work hard to meet the requirements of the Report on the Work of the Government by becoming more innovative in terms of monetary policies and rendering financial support in a more targeted and precise manner: 

First, the PBC is going to extend the policy of provisional deferment of loan principal and interest repayments for MSMEs. Specifically, MSMEs will be allowed to repay loan principals which are set to mature by end-2020 and accrued interests of loans remaining outstanding by end-2020 as late as March 31, 2021. In the meantime, financial institutions will be required to make their best efforts to defer repayments of inclusive MSB loans.

Second, the PBC will ramp up credit support for MSBs. A plan of inclusive MSB credit support will be in place, and new monetary policy tools will be created to support eligible locally incorporated banking financial institutions to issue new inclusive MSB credit loans, so as to encourage banking financial institutions to lift the proportion of credit loans.

Third, the PBC will improve the government-backed guarantee mechanism. We will raise the multiplier of policy financing guarantors, expand the scale of financing guarantees, focus less on the requirements for profit assessment, and lower guarantee rates and counter guarantee requirements. Moreover, local governments will be encouraged to develop “cash pooling” of risk compensation to support MSBs for emergency on-lending and government-backed financing guarantors for capital replenishment.

Fourth, the PBC will reinforce support for financing in the bond market. We will guide the growth of full-year net financing of corporate credit bonds to increase by RMB1 trillion over the previous year, so as to release more credit resources to support MSBs. At the same time, we will support financial institutions to issue RMB300 billion worth of special financial bonds to MSBs in 2020, which will be exclusively spent as MSB loans.

Fifth, the PBC will work hard to develop supply chain finance. Credit support for the resumption of work and production of key enterprises, leading enterprises and their associated enterprises will be boosted to propel the recovery of industry chains. We will also accelerate the implementation of regulations on timely payments and strengthen key enterprises’ repayments of accounts payable. We are also going to capitalize on the platform for accounts receivable financing services to help MSMEs raise RMB800 billion via this form of financing in 2020. In addition, efforts will be made to urge key enterprises to confirm the authenticity and integrity of accounts receivable in a bid to encourage the use of commercial bills with well-defined rights and responsibilities in accounts receivable.

Journalist: This year marks the end of the Three Critical Battles. What achievements has the PBC made in forestalling and defusing major financial risks after more than two years of hard work? Will the COVID-19 pandemic add to the risks challenging China’s financial system, particularly those faced by small and medium-sized banks? Are there any precautionary measures?

Yi Gang: Since 2018, in accordance with the decisions and arrangements of the CPC Central Committee and the State Council, and the requirements of the Financial Stability and Development Committee (FSDC), the financial sector has captured positive progress in forestalling and defusing financial risks with a range of proactive and effective measures. Specifically, we have secured preliminary progress in curbing the excessively rapid growth of the macro leverage ratio, effectively contained the chaotic development of shadow banking, and advanced the steady and orderly disposal of key high-risk financial groups. Financial risks involving the public like those of Internet finance and illegal fundraising have been brought under full control, and system refinement of forestalling and defusing financial risks is well underway, enabling effective response to financial market fluctuations and risks concerning external shocks. In general, prominent risks in key fields are treated in an orderly manner, the upward momentum of systemic risks is effectively contained, and the financial sector is developing steadily and healthily as a whole.

Nevertheless, the COVID-19 pandemic has taken an unprecedented toll on China’s economic and social development and exerted certain downward pressure on the quality of banks’ credit assets. Specifically, the risks of some small and medium-sized financial institutions attract our attention. In Q1 2020, commercial banks in China registered a net profit of RMB600 billion, which was mainly attributed to the increased assets and a lowered management cost-to-income ratio in the banking sector. Due to the lag of nonperforming loan (NPL) risk exposure and the deferment of   enterprises’ principal and interest repayment of bank loans, banks may face considerable pressure caused by a rising NPL ratio, growing nonperforming assets and increased difficulties in the disposal of bad assets later on.

Meanwhile, if the pandemic is prolonged globally, the world economy will bear increasingly heavy losses and the turmoil in the overseas financial markets may spread further, which will deal a blow to the Chinese market and bring about uncertainties to our balance of payments and cross-border capital flow.

Going forward, based on a full assessment of difficulties, risks and uncertainties, we will stick to the general principle of pursuing progress while ensuring stability. We will continue to follow the fundamental guidelines and policies established by the central government, properly handle the relationship between pandemic containment, economic recovery and risk control, strengthen countercyclical adjustments of macro policies, and prudently advance risk disposal tasks. We will also support banks, especially small and medium-sized ones, to replenish capital through multiple channels, improve governance and enhance disposal of NPLs, so as to bolster the soundness of financial institutions.

In forestalling and defusing financial risks, the PBC will earnestly fulfill the functions and responsibilities as the Office of the FSDC under the State Council by enhancing the coordination of financial regulation, properly handling the relationship between holding the bottom line of preventing systemic financial risks and guarding against moral hazards, and putting greater emphasis on ensuring that financial institutions assume major responsibilities, local governments fulfill responsibilities within their jurisdictions, financial regulators undertake regulatory responsibilities and act as the lender of last resort. Once any major financial risk occurs, relevant shareholders and creditors shall bear the consequential losses according to the law, and stringent measures shall be taken to hold relevant institutions and personnel accountable for illegal conducts and negligence and dereliction of duties.

Journalist: This year’s Report on the Work of the Government noted that we should advance reforms to promote market-based allocation of factors. How will the PBC further promote market-based reform of interest rates?

Yi Gang: Interest rates are the most important financial factor prices. As one of the foremost reforms in the financial sector, the market-based reform of interest rates aims to improve the mechanism where prices are mainly determined by the market, and to prudently promote the integration of benchmark deposit and lending rates with market interest rates. The PBC eased the control over lending rates and deposit rates in July 2013 and October 2015 respectively. Since the PBC launched a reform in August 2019 to improve the LPR formation mechanism, noteworthy progress has been made in the market-based reform of interest rates:

First, the correlation between then LPR and the supply and demand of market funding has been significantly enhanced. For example, the one-year and above-five-year LPRs released in May 2020 stood at 3.85 percent and 4.65 percent respectively, down 0.4 percentage points and 0.2 percentage points respectively from August 2019 when the reform started. This fully reflects changes in the supply and demand of market funding.

Second, the transmission efficiency of monetary policy has been substantially increased. In mid-May 2020, loans issued at rates that were less than 0.9 times the original benchmark lending rate accounted for 35.3 percent of all new loans, nearly four times the volume prior to the LPR reform. The implicit floor of lending rates has been removed.

Third, effective moves have been made to lower lending rates in real terms. In April this year, the average interest rate on corporate loans recorded 4.81 percent, decreasing 0.51 percentage points from July 2019 prior to the LPR reform. The decline is projected to continue into May.

Fourth, the LPR reform has also been an important catalyst for the market-based reform of deposit rates. As the interest rates in loan markets go down, banks make less profit from loan issuance. As a result, in order to match with the yields of assets, they will reduce the cost of liabilities as appropriate, thus impairing the motivation to solicit deposits with high interest rates. In fact, certain changes have taken place in banks’ deposit rates, as some banks have voluntarily lowered deposit rates, and the rates on deposit-like products such as money market funds which practice market-based pricing have fallen as well.

In the next step, the PBC will continue to deepen the LPR reform, smooth the transmission from interest rates in the money market to lending rates, and drive down real lending rates, so as to support the development of the real economy. Meanwhile, the transition of the pricing benchmark of outstanding loans will be advanced in an orderly manner.

Journalist: Faced with changes in the external environment, the financial sector has been resolutely promoting opening-up at a higher level and liberalizing and facilitating trade and investment in recent years. What progress has been made in the implementation of the opening-up measures? Will the COVID-19 pandemic adversely influence the pace of China’ opening-up endeavors? What new measures will be rolled out to facilitate financial opening-up this year?

Yi Gang: In recent years, the financial sector has rolled out over 40 measures to advance voluntary opening-up both domestically and internationally. At present, solid progress has been made in the implementation of these measures, with most of them put in place at both legislative and practical levels.

First, the foreign ownership caps in fields like banking, securities, fund management, futures and life insurance have been completely lifted, and the qualification requirements for foreign shareholders have been constantly relaxed.

Second, national treatment has been granted to foreign-funded institutions in fields such as enterprise credit reporting, credit rating and payment businesses. The inter-connectivity of capital markets has been continuously deepened, and accounting, taxation and trading and other supporting systems have been continuously improved.

Third, the pandemic has not disrupted China’s pace to open up the financial market. Recently, MasterCard’s application for accessing China’s bank card clearing market has been approved. Fitch Ratings has become the second international credit rating agency to enter the Chinese market following S&P Global. Goldman Sachs and Morgan Stanley have been approved to take control of their securities joint ventures in China. Furthermore, the entry of foreign-funded financial institutions like BlackRock and Neuberger Berman into the Chinese market is also advancing in an orderly manner.

These opening-up measures are designed to foster an open and inclusive financial environment which allows full competition, encourages innovations to the greatest extent and facilitates the financial sector in serving the real economy. While opening up wider, the financial sector has also constantly improved macroprudential management, strengthened efforts to prevent risks and worked hard to ensure financial regulatory capabilities and intensity stay adaptive to and in sync with financial opening-up.

In the next step, the PBC will continue acting upon the principle of market-oriented, law-based and internationalized development to actively and prudently promote the voluntary opening-up of the financial sector both domestically and internationally, and focus our efforts on the following aspects:

First, the PBC will continue to effectively implement financial opening-up measures introduced in recent years and ensure that all of them are conscientiously carried out, so as to draw more foreign-funded and private financial institutions to the Chinese market.

Second, the PBC will push for the thorough implementation of the pre-establishment national treatment and negative list system to promote systematic and institutionalized opening-up with consistent entry criteria.

Third, the PBC will continue improving the business environment, streamline administration and delegate power, respect contracts, protect property rights, enhance the communication mechanism for policy making, and replace more ex-ante review and approval procedures with interim and ex-post supervision. Economic entities under all forms of ownership will be treated on an equal footing, and the fundamental role of the competition system will be strengthened.

Fourth, the PBC will closely coordinate efforts to widen opening-up and to enhance regulation so as to effectively forestall and defuse financial risks.

Journalist: The PBC started the research on central bank digital currency early on, and has launched internal and closed pilot testing in some cities. What is the significance of issuing central bank digital currency? What are the updates on the testing? And when is it expected to be issued officially?

Yi Gang: At present, digital economy has become an increasingly important driving force for global economic growth. The research on and the application of the central bank digital currency can help efficiently satisfy the public’s demand for fiat money in the context of digital economy, and improve the convenience, security and anti-counterfeiting features of retail payments, thereby speeding up the development of China’s digital economy.

The PBC has started the study into central bank digital currency at an earlier time. In 2014, a specialized team was formed to probe into the digital currency issuance framework, key technologies, issuance and circulation environment as well as international practices in this regard. At end-2017, the PBC was approved to organize some well-established commercial banks as well as relevant institutions to work on the R&D of the digital RMB system, namely Digital Currency Electronic Payment (DC/EP). Based on the premises of two-layer operation, cash (M0) substitution and controllable anonymity, the PBC has basically completed the top-level design, formulation of standards, R&D of functions and joint debugging tests.

Currently, we are advancing the R&D of DC/EP in line with the principles of steadiness, security, controllability, innovation and practicability. Internal and closed pilot tests are conducted in Shenzhen, Suzhou, Xiong’an, Chengdu and some scenarios of the coming Winter Olympics to verify the reliability of theories, stability of systems, usability of functions, convenience of processes, applicability to scenarios and controllability of risks.

However, these pilot tests are just part of our routine work in the R&D process, and should not be interpreted as an official issuance of DC/EP. There is no timetable for the official issuance yet.

Journalist: This year will be a year of decisive victory for completing the building of a moderately prosperous society in all respects. What progress has the PBC made in delivering financial support for poverty alleviation? What measures will the PBC adopt to optimize financial services for agriculture, rural areas and famers while putting risks under control, so as to better facilitate rural revitalization?

Yi Gang: In recent years, the PBC has adhered to the approaches of coordinating financial support for poverty alleviation with financial inclusion and integrating financial support with risk prevention. As a result, the policies, organizations, products and service system with respect to financial support for targeted poverty alleviation have been constantly improved, and solid results have been achieved on all fronts.

In 2020, China will conclude the battle against poverty, and complete the goal of building a moderately prosperous society in all respects. Following the guidance of Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era, the PBC will lay equal emphasis on financial support and risk prevention, win the battle against extreme poverty, lift all the remaining impoverished population and counties out of poverty, ensure high-quality poverty alleviation and explore the establishment of a long-term mechanism for eradication of relative poverty.

In the next step, the PBC will make continued efforts by focusing on the following aspects. First, we will ensure a solid implementation of the policies on financial support for poverty alleviation, strengthen the application of monetary policy tools like central bank lending for poverty alleviation, provide stronger support for destitute areas like the “three regions and three prefectures”, and make financial services more inclusive and accessible in these areas. Second, the PBC will intensify financial support for efforts to eradicate poverty through industrial growth, help poverty-stricken areas to cultivate and develop businesses facilitating poverty alleviation, promote the integrated development of financial support and poverty alleviation through industrial growth, and expand financial support for industrial development following poverty alleviation through relocation. Third, steps will be taken to promote sustainable development of poverty alleviation through financial support, enhance quality monitoring of credit assets in impoverished areas, especially micro credit for poverty alleviation, enable prompt early warnings and prevent people from returning back to poverty because of the loans. Fourth, the PBC will advance the development of inclusive finance, accelerate the construction of infrastructure for payment, credit reporting and other basic services in impoverished areas, enhance the publicity of financial knowledge and the protection of the rights and interests of financial consumers, as well as consolidate and improve basic financial services in these areas. Fifth, the PBC will effectively align financial support for poverty alleviation with the strategy of rural revitalization, improve the capabilities of county-level incorporated financial institutions to serve rural areas and impoverished areas, summarize and publicize the achievements of targeted poverty alleviation through financial support, carry out research on follow-up policies in 2020, and establish a long-term mechanism to address relative poverty.