In recent years, in line with the decisions and arrangements made by the Central Committee of the Communist Party of China (CPC) and the State Council, the People’s Bank of China (PBOC) has given full play to the roles of monetary policy instruments in adjusting both the aggregate and the structure. Focusing on key areas and weak links in the national economy, including financial inclusion, green development, and sci-tech innovation, to serve the high-quality economic development, the PBOC has taken steps to establish a system of structural monetary policy instruments based on China’s reality.

I. Structural monetary policy instruments have adjusted both the aggregate and the structure and promoted stable growth of the credit aggregate.

Structural monetary policy instruments are used by the PBOC to guide the credit allocation of financial institutions, given their roles in targeted liquidity provision and as a leverage. By means of providing central bank lending or incentive funding support, the PBOC encourages financial institutions to step up their credit supply to designated areas and sectors and thus reduce the financing costs of businesses.

Structural monetary policy instruments adjust both the aggregate and the structure. They provide targeted liquidity for the real economy, which is their unique edge, as they link the central bank funding to the credit supply by financial institutions to designated areas and sectors under incentive compatible mechanisms. At the same time, they inject base money into the economy, thus keeping the liquidity in the banking system adequate at a reasonable level and maintaining stable credit growth.

II. A coordination mechanism has been established across government agencies for policy synergy.

The use of structural monetary policy instruments follows a mechanism where financial institutions make lending decisions and manage loan books independently; the PBOC provides ex-post reimbursements and controls the cap; and relevant agencies identify the loan purposes and conduct random inspections. As such, the loans of financial institutions are connected with the central bank lending, which helps encourage financial institutions to improve their credit structure and provide targeted support for such areas as green development and sci-tech innovation.

First, instead of lending directly to businesses, the PBOC adopts a “reimbursement” mechanism whereby financial institutions lend and get “reimbursed”. In other words, financial institutions lend to businesses and manage their loan books independently based on market principles and the rule of law, and apply to the PBOC for central bank lending or incentive funds afterwards, which will be provided in proportion to their newly granted loans or incremental balances.

Second, competent authorities decide where the funds go. Based on the industry foundation built by the National Development and Reform Commission (NDRC), the Ministry of Science and Technology (MOST), the Ministry of Industry and Information Technology (MIIT), the Ministry of Ecology and Environment (MEE), the Ministry of Transport (MOT), and the National Energy Administration (NEA), competent authorities use the existing financial statistics system or establish a separate loan book to determine the target areas or sectors for credit support. In this way, they tap into their respective advantages and policy synergy is formed.

Third, an ex-post verification and error correction mechanism has been put in place. Competent authorities work hand in hand with financial regulators to conduct ex-post random inspections, while auditors and the public oversee the use of funds. In case a financial institution is found to have loan records revealing loan issuance beyond the scope of financial support, it will be required to replenish the shortfall, or the central bank lending provided will be withdrawn, so as to prevent illicit acquisitions of central banking lending by financial institutions.

III. A toolkit of diverse structural monetary policy instruments has been put in place to provide targeted support for the real economy.

The existing structural monetary policy instruments can be categorized from the following three dimensions:

First, they can be classified into long-term and temporary instruments. Long-term instruments, including the central bank lending and discounts for rural development, and micro and small businesses (MSBs), mainly support the long-term mechanism for financial inclusion. The rest are temporary instruments. They have specified period of validity or withdrawal arrangements.

Second, they can be categorized into headquarters-managed and branch-managed instruments. Instruments managed by the PBOC headquarters are primarily temporary in nature and are available to financial institutions licensed to operate nationwide. They are usually launched and withdrawn in a fast way to ensure efficient implementation. All temporary instruments, except the instrument supporting inclusive MSB loans, fall into this category. Instruments managed by the PBOC branches are mainly long-term ones, such as the central bank lending and discounts for rural development and MSBs. Still, temporary instruments such as the instrument supporting inclusive MSB loans are managed by the PBOC branches. Available to locally incorporated financial institutions, these instruments are designed to serve the primary level in an inclusive manner.

Third, they can be categorized into instruments offering funds through central bank lending and those offering incentive funds. In the case of the former, financial institutions need to first extend credit support to designated areas and sectors. The PBOC then conducts central bank lending in proportion to the loans granted by financial institutions. All structural monetary policy instruments, except the instrument supporting inclusive MSB loans, operate under this model. As to the latter, financial institutions need to extend continuous credit support to designated areas and sectors. The PBOC then offers them incentive funds in proportion to the incremental balance of loans. For the time being, this model is applicable to the instrument supporting inclusive MSB loans.