China Monetary Policy Report Q4 2020

China Monetary Policy Report

Q4 2020

(February 8, 2021)

Monetary Policy Analysis Group of

the People's Bank of China

Executive Summary

The year 2020 is an extraordinary year. In the complicated and severe environment

both at home and abroad, especially in the face of the fallout from COVID-19, the

Chinese nation has, under the strong leadership of the CPC Central Committee with

Comrade Xi Jinping at its core, made concerted efforts and achieved significant

strategic results in coordinating pandemic containment and economic and social

development. The 13th Five-Year Plan wrapped up smoothly, and China is on course

to finish building a moderately prosperous society in all respects. With its economy

recovering steadily, China is the only major economy to register positive growth in

2020 and one of the few major economies staying on a normal monetary policy path.

In 2020, China’s gross domestic product (GDP) grew by 2.3 percent, with its volume

exceeding RMB100 trillion, and the consumer price index (CPI) rose 2.5 percent.

Employment was generally stable, and import and export trade increased despite the

unfavorable environment.

Following the guidance of Xi Jinping Thought on Socialism with Chinese

Characteristics for a New Era, the People's Bank of China (PBC) resolutely

implemented the decisions and arrangements of the CPC Central Committee and the

State Council, rose to challenges and responded proactively with stronger macro

policies. The sound monetary policy was flexible, appropriate and targeted.

Remaining committed to the specific goals of maintaining an appropriate aggregate

policy, notably lowering financing costs and supporting the real economy in the face

of great uncertainties, the PBC flexibly managed the intensity, pace and focus of

policy adjustments, ensured stability on six fronts, namely employment, the financial

sector, foreign trade, foreign investment, domestic investment and expectations, and

maintained security in six areas, namely, employment, people’s basic livelihood,

operations of market entities, food and energy security, stable industrial and supply

chains, and the normal functioning of primary-level governments, hence cultivating a

proper monetary and financial environment for achieving decisive success in the

building of a moderately prosperous society in all respects.

First, promoting scientific decision-making, the PBC made prompt and effective

responses. In terms of the aggregate, support measures totaling more than RMB9

trillion were introduced via a mix of tools, including required reserve ratio cuts, the

Medium-term Lending Facility (MLF), central bank lending and central bank

discounts. In terms of price, the rates of the MLF and open market operations (OMOs)

dropped by 30 basis points guided by the PBC in a forward-looking manner, which

brought down market rates. The one-year loan prime rate (LPR) also declined.

Second, responding creatively, the PBC provided direct and targeted policy support to

stabilize businesses and bolster employment. Central bank lending and central bank

discounts totaling RMB1.8 trillion were provided in three phases in line with the

needs of pandemic containment and economic development. Two innovative tools

enabling direct support for the real economy were launched and the set of structural

monetary policy tools was improved. Third, taking reform and opening-up as the

driving force, the PBC deepened the market-based reforms of interest rates and the

exchange rate. The work of shifting the pricing benchmark for outstanding

floating-rate loans, which began as scheduled, has been completed smoothly.

Determined to remove the implicit floor of loan rates, the PBC promoted the LPR and

greatly enhanced the transmission efficiency of interest rates. The PBC also improved

the RMB exchange rate formation mechanism, enhanced the flexibility of the RMB

exchange rate, and intensified macro-prudential management. Fourth, remaining

proactive, the PBC stabilized market expectations. Attaching importance to

expectation management, the PBC improved institutionalized ways of communicating

monetary policies and played an active role in international monetary policy

coordination. Fifth, upholding market-oriented and law-based principles, the PBC

well managed financial risks and firmly defended the bottom line that no systemic

risk should occur.

Overall, the sound monetary policy proved to be forward-looking, proactive, precise

and effective in 2020, and it provided strong support for China to take the lead in

containing the pandemic, resuming work and production, and achieving positive

economic growth. A mix of measures was introduced to guide the financial sector to

waive RMB1.5 trillion of profits in support of the real economy, providing the real

sector with significantly more perceivable benefits. The monetary policy target was

smoothly achieved. At end-2020, broad money (M2) and aggregate financing to the

real economy (AFRE) grew 10.1 percent and 13.3 percent year on year respectively.

The overall financing costs for enterprises declined remarkably. The weighted average

rate on corporate loans registered 4.61 percent in December 2020, down 0.51

percentage points from December 2019, hitting a new record low. The credit structure

continued to improve. At end-2020, the inclusive loans to micro and small businesses

(MSBs) and the medium and long-term (MLT) loans to the manufacturing sector grew

by 30.3 percent and 35.2 percent year on year respectively. The RMB exchange rate

moved in both directions with enhanced flexibility based on market supply and

demand and remained basically stable at an adaptive and equilibrium level. The China

Foreign Exchange Trade System (CFETS) RMB Index registered 94.84 at end-2020,

3.78 percent higher than that at end-2019.

Now with China’s economy returning to normal, the intrinsic momentum for growth

is rising and macroeconomic conditions are improving. However, it should also be

noted that internationally the economic and financial conditions are still complicated

and severe, uncertainties remain concerning the pandemic and the external

environment, and domestically the foundation for economic recovery is not yet solid.

Therefore, it is necessary to have a deep understanding and a dialectical view of the

situation, heighten awareness about potential difficulties, remain confident of

reaching goals, and focus on our own affairs, so as to achieve high-quality

development. In the next stage, under the guidance of Xi Jinping Thought on

Socialism with Chinese Characteristics for a New Era, the PBC will follow the

guidelines of the Fifth Plenary Session of the 19th CPC Central Committee and the

Central Economic Work Conference, implement the decisions and arrangements of

the CPC Central Committee and the State Council, and adhere to the general principle

of seeking progress while ensuring stability. Based on the requirements of the new

development stage, the PBC will apply the new development philosophy and foster a

new development paradigm. It will prioritize stability, focus on key tasks, defend the

bottom line, and live up to its responsibilities in a bid to consolidate and further the

success achieved in pandemic containment as well as in social and economic

development. With the policy maintaining its continuity, stability and sustainability,

the PBC will improve macroeconomic governance, build a modern central banking

system, conduct cross-cyclical policy designs, foster an aggregate balance, optimize

the economic structure, strike a balance between internal and external dynamics,

continue the efforts to ensure stability on six fronts and maintain security in six areas,

thereby contributing to a good start for the establishment of a new development

paradigm and bringing on a new look.

The sound monetary policy will be flexible, targeted, reasonable and appropriate.

Prioritizing stability, the PBC will not make an abrupt turn in its policy stance. Instead,

it will manage the timing, intensity and effectiveness of its policies, properly handle

the relationship between economic recovery and risk prevention, and keep sustainable

room for normal monetary policy. By improving the mechanism of money supply

management, the PBC will ensure proper control of the aggregates so as to keep

liquidity adequate at a reasonable level, the growth of M2 and AFRE basically in line

with that of nominal GDP, and the macro leverage ratio basically stable. Meanwhile,

flexible adjustments will be made to the intensity, pace and focus of policy to

accommodate changes in circumstances. Structural monetary policy tools will play

their roles in targeted liquidity provision, and institutional mechanisms will be

developed for the financial sector to provide support for the real economy. More

financial support will be extended to scientific and technological innovation, MSBs

and green development. The PBC will enhance the market-oriented interest rate

formation and transmission mechanism by improving the policy rate system and

deepening the LPR reform so as to consolidate the achievements made in lowering

real lending rates and to stabilize and reduce the overall financial costs for enterprises.

By enabling the market to play a decisive role in the formation of the RMB exchange

rate and by enhancing macro-prudential management, the PBC will increase the

flexibility of the RMB exchange rate and keep the RMB exchange rate basically

stable at an adaptive and equilibrium level. More efforts will be put into monitoring

and analysis as well as expectation management in order to keep prices basically

stable. To safeguard financial security and to firmly defend the bottom line that no

systemic risk should occur, the PBC will reinforce the institutional system for

financial risk prevention, early warning, resolution and accountability. With

innovation and high-quality supply guiding and creating new demands, the PBC will

make its contribution to accelerating the establishment of a new development

paradigm with domestic circulation as the mainstay and domestic and international

circulations reinforcing each other.

Contents

Part 1. Money and Credit Analysis.........................................................................................8

I. Liquidity in the banking system was adequate at a reasonable level

..................................

II. Lending by financial institutions grew reasonably, with the credit structure optimized

and the lending rates moving downwards

..............................................................................

III. Broad money supply and aggregate financing to the real economy grew at a reasonable

rate

........................................................................................................................................

IV. The RMB exchange rate fluctuated, and cross-border RMB transactions continued to

grow

.....................................................................................................................................

Part 2. Monetary Policy Operations..................................................................................... 20

I. Conducting open market operations in a flexible manner

................................................

II. Timely conducting Medium-term Lending Facility and Standing Lending Facility

operations

.............................................................................................................................

III. Enhancing monetary and credit support to offset the impact of the COVID-19 pandemic

..............................................................................................................................................

IV. Lowering the Required Reserve Ratio for financial institutions

...................................

V. Further improving the macro-prudential policy framework

...........................................

VI. Actively leveraging the role of structural monetary policy instruments

.......................

VII. Bringing into play the role of credit policy in guiding structural reform

.....................

VIII. Further deepening the market-based interest rate reform

...........................................

IX. Improving the market-based RMB exchange rate formation mechanism

.....................

X. Promoting the resolution of financial risks in a prudent and orderly manner and

deepening the reform of financial institutions

.....................................................................

XI. Deepening the reform of foreign exchange arrangements

.............................................

Part 3. Financial Market Conditions.................................................................................... 38

I. Financial market overview

...............................................................................................

II. Development of institutional arrangements in the financial markets

..............................

Part 4. Macroeconomic Overview......................................................................................... 49

I. Global economic and financial developments

..................................................................

II. Macroeconomic developments in China

.........................................................................

Part 5. Monetary Policy Outlook.......................................................................................... 67

I. Outlook for the Chinese economy

....................................................................................

II. Outlook for monetary policy in the next stage

................................................................

Boxes

Box 1 Strengthening Deposit Management and Safeguarding Competitive Order in the Deposit

Market...................................................................................................................................... 14

Box 2 Boosting Green Finance to Reach a Carbon Emissions Peak and Achieve Carbon Neutrality

...................................................................................................................................................30

Box 3 The Spillover Effect of Monetary Policies in the Major Economies.....................................53

Box 4 Rational Evaluation of Risks Concerning Household Debt.................................................. 58

Tables

Table 1 The Structure of RMB Loans in 2020..................................................................................10

Table 2 New RMB Loans by Financial Institutions in 2020............................................................ 10

Table 3 Weighted Average Interest Rates on New Loans Issued in December 2020......................11

Table 4 Shares of RMB Lending Rates at Different Levels from January to December 2020........12

Table 5 Average Interest Rates of Large-value USD-denominated Deposits and Loans from

January to December 2020........................................................................................................13

Table 6 The Structure of RMB Deposits in 2020............................................................................. 14

Table 7 Aggregate Financing to the Real Economy in 2020............................................................ 17

Table 8 Trading Volume of the RMB Against Other Currencies in the Interbank Foreign Exchange

Spot Market in 2020..................................................................................................................36

Table 9 Fund Flows Among Financial Institutions in 2020..............................................................39

Table 10 Transactions of Interest Rate Swaps in 2020.....................................................................41

Table 11 Bond Issuances in 2020......................................................................................................43

Table 12 Asset Allocations in the Insurance Sector at End-2020.....................................................44

Table 13 Macroeconomic and Financial Indicators in the Major Advanced Economies.................51

Table 14 Floor Area of Real Estate Projects that were Newly Started, Under Construction, and

Completed in 2020.................................................................................................................... 64

Figures

Figure 1 Movement of Money Market Interest Rates

........................................................................

Figure 2 Monthly RMB Payments and Receipts under the Current Account

..................................

Figure 3 Convergence of Interest Rates on Interbank CDs and Yields on Government Bonds

Toward the MLF Rate

...............................................................................................................

Figure 4 Volume of Spot Transactions of Bank-issued Perpetual Bonds

.........................................

Figure 5 Yield Curves of Government Securities on the Interbank Market

.....................................

Figure 6 Household Leverage in a Global Context

..........................................................................

Figure 7 Year-on-Year Growth of the Value-added of the High-tech Manufacturing Industry

.......

Part 1. Money and Credit Analysis

Since the beginning of 2020, the People's Bank of China (PBC) has resolutely

implemented the decisions and arrangements made by the CPC Central Committee

and the State Council. Under a sound monetary policy which is more flexible,

appropriate and targeted, this year witnessed a reasonable growth in money and credit

and aggregate financing, a further improved structure, and a significant drop in overall

financing costs for enterprises. Buttressed by the realization of monetary policy goals,

China took the lead in pandemic containment and the resumption of work and

production, and became the first economy to post positive growth.

I. Liquidity in the banking system was adequate at a reasonable level

In 2020, amid the impact of the pandemic and the complicated economic conditions at

home and abroad, there was much more uncertainty about liquidity demand and

supply in the banking system. Based on the characteristics of pandemic containment

and recovery of the economy and society at different stages, the PBC timely adjusted

the intensity and pace, and comprehensively used rich policy tools, to keep the total

liquidity in line with market demands, including reserve requirement ratio (RRR) cuts,

central bank lending, central bank discounts, the medium-term lending facility (MLF),

and open market operations (OMOs). These measures not only helped ensure stable

performance of the financial system and satisfy emergency demands for liquidity

arising from guaranteeing supplies and resuming work and production during the

outbreak of the pandemic but also gradually restored total liquidity to its normal level

during the course of the economic and social recovery. In the meanwhile, by

announcing monetary policy arrangements in advance and other means, the PBC

strengthened expectation management and ironed out short-term disturbances in a

timely manner. Money-market interest rates were guided to move around the OMO

rates, and policy rates were fully exploited as a pivot. Stable market expectations

enabled financial institutions to trim down their preventive demands for liquidity. At

end-December, the excess reserve ratio of financial institutions registered 2.2 percent,

down 0.3 percentage points from the end of the previous year.

Figure 1 Movement of Money Market Interest Rates

Source: www.chinamoney.com.cn.

II. Lending by financial institutions grew reasonably, with the credit structure

optimized and the lending rates moving downwards

Credit provided stronger support for the real economy at a reasonable pace.

Outstanding loans issued by financial institutions in domestic and foreign currencies

grew 12.5 percent year on year to RMB178.4 trillion at end-2020, increasing

RMB19.8 trillion from the beginning of the year and RMB3.0 trillion more than the

increase in the corresponding period of 2019. Outstanding RMB-denominated loans

grew 12.8 percent year on year to RMB172.7 trillion, up RMB19.6 trillion from the

beginning of the year and an increase that was RMB2.8 trillion larger than that during

the corresponding period of the previous year. In response to the pandemic, financial

institutions increased their loans in the first half of 2020, especially in the first quarter.

After the economy gradually recovered, credit expansion returned to normal, and it

changed in small increments during the second half of 2020, basically flat compared

with the previous year. Over the past four quarters of 2020, loans increased RMB7.1

trillion, RMB5.0 trillion, RMB4.2 trillion, RMB3.4 trillion respectively, a

year-on-year acceleration of RMB1.3 trillion, RMB1.1 trillion, RMB211.1 billion,

RMB191.1 billion, stabilizing quarter by quarter.

The credit structure continued to be optimized. Medium and long-term loans to the

manufacturing sector and loans to micro and small businesses (MSBs) recorded a

rapid growth. At end-2020, loans to enterprises and public entities grew by RMB12.2

trillion from the beginning of the year, a year-on-year acceleration of RMB2.7 trillion.

Medium and long-term loans to the manufacturing sector gained 35.2 percent,

accelerating for fourteen consecutive months. Outstanding inclusive loans to MSBs

grew by 30.3 percent year on year to RMB15.1 trillion, 7.2 percentage points higher

than that at end-2019. These loans supported 32.28 million MSBs, an increase of 19.4

percent year on year. In 2020, inclusive loans to MSBs increased by RMB3.5 trillion,

a year-on-year acceleration of RMB1.4 trillion.

Table 1 The Structure of RMB Loans in 2020

Unit: RMB100 million

Outstanding amount

at end-2020

YOY growth

(%)

Increase from the

beginning of the

year

YOY

acceleration

RMB loans to:

1727452

12.8%

196340

28196

Households

631847

14.2%

78657

4354

Enterprises and public

entities

1084388

12.6%

121673

27192

Non-banking financial

institutions

5121

-47.9%

-4706

-3773

Overseas

6096

13.6%

717

424

Note: Loans to enterprises and public entities refer to loans to non-financial enterprises,

government departments, and organizations.

Source: The People’s Bank of China.

Table 2 New RMB Loans by Financial Institutions in 2020

Unit: RMB100 million

Increase from the beginning of

the year

YOY acceleration

Chinese-funded large-sized banks

87430

19710

Chinese-funded small and medium-sized

banks

106968

6497

Small-sized rural financial institutions

25210

4343

Foreign-funded financial institutions

638

-392

Notes: 1. Chinese-funded large-sized banks refer to banks with assets (in both domestic and

foreign currencies) of RMB2 trillion or more (according to the amount of total assets in both

domestic and foreign currencies at end-2008). 2. Chinese-funded small and medium-sized banks

refer to banks with total assets (both in domestic and foreign currencies) of less than RMB2

trillion (according to the amount of total assets in both domestic and foreign currencies at

end-2008). 3. Small-sized rural financial institutions include rural commercial banks, rural

cooperative banks, and rural credit cooperatives.

Source: The People’s Bank of China.

The weighted average interest rates on loans hit a record low. In 2020, with the

deepening of the loan prime rate (LPR) reform, the implicit floor of loan rates was

completely removed and the efficiency of the transmission of monetary policy was

further enhanced. The low lending rates created favorable conditions for financial

institutions to waive profits of RMB1.5 trillion in favor of the real economy. In

December 2020, the one-year LPR fell by 0.3 percentage points from December 2019

to 3.85 percent, and the over-five-year LPR fell by 0.15 percentage points to 4.65

percent. The weighted average lending rate recorded 5.03 percent, down 0.41

percentage points year on year, falling to a record low. In particular, the weighted

average interest rate on ordinary loans registered 5.30 percent, down 0.44 percentage

points year on year. The weighted average corporate lending rate fell by 0.51

percentage points from December 2019 to 4.61 percent, a drop clearly exceeding that

of the LPR, breaking the record for the second successive month. This shows the role

that the LPR plays in indicating direction and guidance.

Table 3 Weighted Average Interest Rates on New Loans Issued in December

2020

Unit: %

December

Change from September

YOY

change

Weighted average interest rate on new loans

5.03

-0.09

-0.41

On ordinary loans

5.30

-0.01

-0.44

Of which: On corporate loans

4.61

-0.02

-0.51

On bill financing

3.10

-0.13

-0.16

On mortgage loans

5.34

-0.02

-0.28

Source: The People’s Bank of China.

In December 2020, the share of ordinary loans with rates above, at, or below the LPR

registered 66.04 percent, 7.02 percent, and 26.93 percent, respectively. In general, the

upward and downward float of the loan rates around the LPR moved downward as a

whole compared with that in December 2019.

Table 4 Shares of RMB Lending Rates at Different Levels from January to

December 2020

Unit: %

Month

LPR-bps

LPR

LPR+bps

Subtotal

(LPR,

LPR+0.5%)

[LPR+0.5%,

LPR+1.5%)

[LPR+1.5%,

LPR+3%)

[LPR+3%,

LPR+5%)

LPR+5%

and above

January

20.63

1.75

77.62

19.95

24.70

16.83

8.95

7.17

February

31.41

2.12

66.47

17.72

21.02

12.29

6.91

8.53

March

24.42

2.75

72.83

19.39

22.81

14.35

8.87

7.42

April

20.72

3.72

75.56

17.40

25.35

14.91

9.88

8.01

May

22.36

5.24

72.41

14.76

25.31

14.10

9.88

8.36

June

24.00

5.97

70.03

14.95

25.63

13.21

8.84

7.40

July

21.69

5.86

72.45

13.63

26.19

14.17

9.48

8.97

August

24.48

6.29

69.23

13.26

23.77

13.62

9.41

9.15

September

24.89

7.41

67.70

13.31

23.74

14.09

8.78

7.79

October

23.63

7.08

69.28

13.76

22.63

13.40

9.67

9.82

November

25.89

5.99

68.12

13.33

23.41

13.47

9.02

8.88

December

26.93

7.02

66.04

13.56

22.62

13.17

8.83

7.86

Source: The People’s Bank of China.

The sustained easy monetary policies of the developed economies prompted a

decrease in the interest rates on foreign-currency deposits and loans. In December

2020, the weighted average interest rates on demand and large-value

USD-denominated deposits with maturities within 3 months registered 0.16 percent

and 0.59 percent, respectively, down 0.14 percentage points and 1.34 percentage

points year on year. The weighted average interest rates on USD-denominated loans

with maturities within 3 months and with maturities between 3 months (including 3

months) and 6 months registered 1.22 percent and 1.36 percent, down 1.79 percentage

points and 1.65 percentage points year on year, respectively.

Table 5 Average Interest Rates of Large-value USD-denominated Deposits and

Loans from January to December 2020

Unit: %

Month

Large-value deposits

Loans

Demand

deposits

Within

months

3–6

months

(including

3 months)

6–12

months

(including

6 months)

year

Over

year

Within

months

3–6

months

(including

3 months)

6–12

months

(including

6 months)

year

Over

year

January

0.31

1.94

2.46

2.61

2.62

2.88

2.78

2.58

2.52

3.71

February

0.28

1.97

2.47

2.48

2.52

2.47

2.76

2.43

2.58

3.49

March

0.21

1.43

1.84

1. 72

1.77

1.68

2.19

1.92

1.80

1.57

2.85

April

0.21

1.06

1.90

2.02

2.08

1.88

2.15

2.26

1.97

1.82

2.43

May

0.21

0.95

1.32

1.38

1.61

1.74

1.71

1.73

1.59

1.62

2.27

June

0.20

0.75

1.32

1.30

1.41

1.45

1.57

1.47

1.41

1.46

2.42

July

0.21

0.70

1.07

1.16

1.39

1.46

1.53

1.43

1.32

2.17

August

0.23

0.73

0.96

1.24

1.36

1.43

1.46

1.40

1.28

1.30

1.95

September

0.21

0.72

0.92

1.16

1.18

1.39

1.37

1.24

1.35

1.29

2.46

October

0.19

0.65

0.94

1.08

1.11

1.27

1.37

1.26

1.22

1.31

1.87

November

0.20

0.61

0.89

0.96

1.13

1.08

1.35

1.21

1.35

1.33

2.21

December

0.16

0.59

0.79

0.86

1.09

1.19

1.22

1.36

1.25

1.30

2.10

Source: The People’s Bank of China.

Deposits grew rapidly. At end-2020, outstanding deposits in domestic and foreign

currencies in all financial institutions posted RMB218.4 trillion, up 10.2 percent year

on year, 1.6 percentage points higher than those at the end of the previous year.

Outstanding RMB deposits registered RMB212.6 trillion, up 10.2 percent year on

year, 1.5 percentage points higher than those at the end of the previous year.

Outstanding deposits in foreign currencies stood at USD889.3 billion, an increase of

USD131.5 billion from the beginning of the year and an acceleration of USD101.3

billion year on year.

Table 6 The Structure of RMB Deposits in 2020

Unit: RMB100 million

Deposits at

end-2020

YOY growth

(%)

Increase from the

beginning of the

year

YOY

acceleration

RMB deposits:

2125721

10.2%

196457

42840

Households

925986

13.9%

112954

15912

Non-financial enterprises

660180

10.9%

65740

32799

Public entities

298738

0.6%

1569

-9818

Fiscal entities

44771

9.6%

3931

3630

Non-banking financial

institutions

183108

6.8%

10645

-891

Overseas

12938

14.5%

1618

1209

Source: The People’s Bank of China.

Box 1 Strengthening Deposit Management and Safeguarding Competitive

Order in the Deposit Market

Safeguarding competitive order in the deposit market is conducive to maintaining a

reasonable and stable cost for financial institutions to assume debt, cutting down on

social financing costs, and creating favorable conditions for the orderly promotion of

the market-based interest rate reform. The PBC attaches great importance to

strengthening deposit management. In accordance with the Regulations on the

Administration of Savings, the Administrative Measures for RMB Corporate Deposits,

and other relevant provisions, the PBC issued the Notice of the PBC on Strengthening

the Administration of Deposit Interest Rates (Yinfa No.59 [2020]), requiring financial

institutions to strictly implement the provisions on setting deposit interest rates as well

as calculating and settling interest. Moreover, the PBC guides the Self-discipline

Mechanism for Market Interest Rate Pricing (referred to as the Interest Rate

Self-discipline Mechanism) to implement self-discipline management of deposit

interest rates so as to maintain orderly competition in the deposit market.

First, urging the rectification of non-compliant deposit innovations. Prior to 2019,

in order to absorb deposits, some financial institutions issued so-called “innovative”

products, such as demand deposit products with interest calculated upon withdrawal

with reference to the interest rate of time deposits with corresponding maturity, time

deposit products withdrawn in advance with interest calculated with reference to the

interest rate of time deposits with corresponding maturity, and time deposit products

with periodic interest payments. These products, whose actual interest rates are

obviously higher than the deposit rates with the same maturities, violate the

regulations that time deposits withdrawn in advance are deemed to be current deposits

when calculating the interest, and the principal and interest of lump-sum time deposits

are due to be repaid in lump sums at maturity. In order to maintain orderly

competition in the deposit market, since 2019 the PBC has guided the Interest Rate

Self-discipline Mechanism to reinforce self-discipline management of the deposit

market, and it has urged financial institutions to operate in accordance with the laws

and regulations and to rectify non-compliant deposit innovations in an orderly manner.

In terms of demand deposit products with interest calculated with reference to the

interest rate of time deposits with corresponding maturity, the outstanding balance

before the rectification (as of May 16, 2019) stood at RMB6.7 trillion. Financial

institutions were required to make rectifications gradually from May 17, 2019 and

halted new businesses from December 1, 2019, with the balance maturing naturally.

As of end-2020, the outstanding balance of the products registered RMB1.2 trillion, a

remarkable drop of RMB5.5 trillion, or over 81 percent, as compared with that before

the rectification. As for time deposit products withdrawn in advance with interest

calculated with reference to the interest rate of time deposits with corresponding

maturity, the outstanding balance posted RMB15.4 trillion before the rectification (as

of December 16, 2019). Financial institutions were required to stop new businesses

immediately from December 17, 2019, and to bring the balance to zero by the end of

2020. In order to implement the rectification requirements, some banks announced in

December 2020 that the interest calculation rules of these time deposit products

withdrawn in advance would be adjusted from January 1, 2021 and they made it clear

that interest on time deposit products withdrawn in advance would be calculated with

reference to the interest rate of demand deposits. As of end-2020, the balance of these

time deposit products had been reduced to zero, a total drop of RMB15.4 trillion.

Second, bringing the guaranteed yield of structural deposits under self-discipline

management. The yield of structural deposits generally consists of a guaranteed yield

and the yield linked to derivatives, the former of which is the same as the interest rate

of common deposits. However, in order to attract customers, some financial

institutions set a relatively high guaranteed yield for structural deposits, which, to

some extent, disturbed competitive order in the deposit market. With the aim of

promoting the regulated and orderly development of structural deposits, in December

2019, the PBC guided the Interest Rate Self-discipline Mechanism to incorporate the

guaranteed yield of structural deposits into the self-discipline management, and urged

banks to set the interest rates at a reasonable level. Moreover, the China Banking and

Insurance Regulatory Commission (CBIRC) also took measures to foster the orderly

development of the structural deposit business by banks. In December 2020, the

guaranteed yield of structural deposits stood at 1.25 percent, 1.18 percentage points

lower as compared with that in December 2019. In the meanwhile, the overall

expected yield and redemption yield of structural deposits witnessed a rapid decline of

0.5 percentage points and 0.54 percentage points from December 2019 to reach 3.09

percent and 3.03 percent in December 2020, respectively. At end-2020, the

outstanding balance of structural deposits amounted to RMB6.3 trillion, RMB4.4

trillion less than the peak of RMB10.7 trillion in April 2020.

Third, strengthening the management of non-local deposits. Non-local deposits

refer to deposits absorbed by locally incorporated banks through accounts opened in

regions or cities where they have not set up physical outlets, including deposits taken

via third-party Internet platforms or through their own online banking and mobile

banking platforms or other channels. In the past two years, some locally incorporated

banks witnessed rapid expansion by absorbing non-local deposits, which deviated

from their positioning of serving local communities. As non-local deposits lack

stability, the accumulated liquidity risks are prone to rapid spreading, jeopardizing the

competitive order in the market and the stability of the financial system. In order to

guide locally incorporated banks to better serve the local communities and to maintain

competitive order in the market, the PBC will, starting from Q1 2021, incorporate

non-local deposits absorbed by locally incorporated banks into the macro-prudential

assessment (MPA), and forbid locally incorporated banks from absorbing non-local

deposits through various channels, with the outstanding balance settled when coming

due. The provision does not apply to banks operating wholly online without physical

outlets. As their business is free of geographical constraints, they are essentially

nationwide banks. Therefore, they are regulated by the Interest Rate Self-discipline

Mechanism with reference to state-owned banks.

As the cornerstone of the interest-rate system, the deposit benchmark interest rate will

remain in place for a long time. Going forward, the PBC will continue to bring the

role of the Interest Rate Self-discipline Mechanism into play, strengthen the

management of non-compliant deposit innovations, structural deposits, and non-local

deposits, prevent irrational competition, safeguard orderly competition in the deposit

market, and maintain a stable cost for banks in assuming debts so as to create a

favorable environment for promoting the market-based interest rate reform and

fostering the steady decline of the comprehensive funding costs of enterprises.

III. Broad money supply and aggregate financing to the real economy grew at a

reasonable rate

At end-2020, outstanding M2 recorded RMB218.7 trillion, up 10.1 percent year on

year, an acceleration of 1.4 percentage points from the end of 2019. Outstanding M1

registered RMB62.6 trillion, a year-on-year growth of 8.6 percent and 4.2 percentage

points higher than that at the end of the previous year. Outstanding M0 reached

RMB8.4 trillion, up 9.2 percent year on year and an increase of 3.8 percentage points

from the end of 2019. The year 2020 witnessed a net cash injection into the economy

of RMB712.5 billion, a rise of RMB314.4 billion year on year.

According to preliminary statistics, outstanding aggregate financing to the real

economy (AFRE) reached RMB284.83 trillion at end-2020, up 13.3 percent year on

year and an acceleration of 2.6 percentage points over the end of the previous year. In

2020, the incremental AFRE reached RMB34.86 trillion on a cumulative basis, an

increase of RMB9.19 trillion year on year. The following features characterized the

growth of the AFRE. First, RMB loans saw a substantially larger year-on-year

increase. Second, the drop in entrusted loans narrowed and the growth in

undiscounted bankers’ acceptances expanded. Third, both corporate bonds and equity

financing increased considerably compared with the previous year. Fourth,

government bond financing recorded a significantly larger year-on-year increase.

Fifth, the increase in asset-backed securities of depository financial institutions

narrowed from the previous year, while the growth of written-off loans accelerated.

Table 7 Aggregate Financing to the Real Economy in 2020

At end-December 2020

In 2020

Stock

(RMB1

trillion)

YOY

growth

(%)

Flow

(RMB100

million)

YOY

change

(RMB100

million)

AFRE

284.83

13.3

348,633

91,898

Of which：RMB loans

171.60

13.2

200,310

31,475

Foreign-currency loans

(RMB equivalents)

2.10

-0.6

1,450

2,725

At end-December 2020

In 2020

Entrusted loans

11.06

-3.4

-3,954

5,442

Trust loans

6.34

-14.8

-11,020

-7,553

Undiscounted bankers’

acceptances

3.51

5.3

1,746

6,503

Corporate bonds

27.62

17.2

44,466

11,082

Government bonds

46.06

22.1

83,370

36,166

Domestic equity financing by

non-financial enterprises

8.25

12.1

8,923

5,444

Other financing

8.07

21.1

14,081

-67

Of which：Asset-backed

securities of

depository

financial

institutions

1.89

12.5

2,109

-1,925

Loans written off

5.28

30.0

12,180

1,629

Notes:

①

The AFRE (stock) refers to the outstanding financing provided by the financial system

to the real economy at the end of a period. The AFRE (flow) refers to the volume of financing

provided by the financial system to the real economy within a certain period of time.

②

Since

December 2019, the PBC has further improved the AFRE statistics by incorporating “treasury

bonds” and “local government general bonds” into the AFRE and combining them with the

existing “local government special bonds” under the item of “government bonds.” The value of

this indicator is the face value of bonds under custody. Since 2019, the PBC has further improved

the “corporate bonds” statistics contained in the AFRE by incorporating “exchange-traded

asset-backed corporate securities.” into it To improve the AFRE statistical method, the PBC has

incorporated “local government special bonds” into the AFRE since September 2018 and has

incorporated “asset-backed securities by depository financial institutions” and “loans written off”

into the AFRE statistics under the item of “other financing” since July 2018.

③

Year-on-year

statistics in the table are on a comparable basis.

Sources: The People’s Bank of China, China Banking and Insurance Regulatory Commission,

China Securities Regulatory Commission, China Central Depository & Clearing Co., Ltd.,

National Association of Financial Market Institutional Investors, etc.

IV. The RMB exchange rate fluctuated, and cross-border RMB transactions

continued to grow

In 2020, cross-border capital flows and foreign exchange supply and demand have

been basically in equilibrium, with market expectations being generally stable. Based

on market supply and demand, the RMB exchange rate moved in both directions and

remained basically stable at an adaptive and equilibrium level. In the first five months,

both China and other economies were hindered by the COVID-19 pandemic and the

international foreign exchange market experienced greater fluctuations. Consequently,

the RMB exchange rate depreciated against the USD and appreciated slightly against

the basket of currencies. After June, China took the lead in containing the pandemic,

and economic fundamentals continued to improve. As a result, the RMB exchange

rate appreciated against both the USD and the basket of currencies. The year 2020

witnessed increased RMB exchange rate elasticity that served an effective role in

regulating the macro-economy and as an automatic stabilizer for the balance of

payments. At end-2020, the China Foreign Exchange Trade System (CFETS) RMB

exchange rate index and the RMB exchange rate index based on the special drawing

rights (SDRs) basket closed at 94.84 and 94.23, respectively, up 3.78 percent and 2.64

percent from end-2019. According to calculations by the Bank for International

Settlements (BIS), at end-2020, the nominal effective exchange rate (NEER) and the

real effective exchange rate (REER) of the RMB appreciated 4.05 percent and 3.33

percent from end-2019, respectively. From 2005 when reform of the exchange rate

formation mechanism commenced to end-2020, the NEER and REER of the RMB

appreciated by 37.67 percent and 51.32 percent, respectively. At end-2020, the central

parity of the RMB against the USD was 6.5249, up 6.92 percent from end-2019,

appreciating by 26.84 percent on a cumulative basis from the launch of the reform of

the exchange rate formation mechanism in 2005. In 2020, the annualized volatility

rate of the RMB exchange rate against the USD was 4.5 percent.

In 2020, cross-border RMB settlements totaled RMB28.4 trillion, up 44 percent year

on year. In particular, RMB receipts and payments registered RMB14.1 trillion and

RMB14.3 trillion, respectively. Cross-border RMB settlements under the current

account grew by 13 percent year on year to RMB6.8 trillion, among which RMB

settlements of trade in goods registered RMB4.8 trillion whereas RMB settlements of

trade in services and other items registered RMB2 trillion. Cross-border RMB

settlements under the capital account posted RMB21.6 trillion, up 59 percent year on

year.

Figure 2 Monthly RMB Payments and Receipts under the Current Account

Source: The People’s Bank of China.

Part 2. Monetary Policy Operations

In 2020, in the face of COVID-19, a pandemic unseen in a century, the PBC has

upheld the guidance of Xi Jinping Thought on Socialism with Chinese Characteristics

for a New Era, resolutely implemented the decisions and arrangements made by the

CPC Central Committee and the State Council, adhered to the fundamental method of

scientific decision-making and innovative response, and adopted a sound monetary

policy in a flexible, appropriate, and targeted manner. The PBC coordinated pandemic

containment with economic and social development, and went all out to ensure

stability on six fronts, namely, employment, the financial sector, foreign trade, foreign

investment, domestic investment, and expectations, and to maintain security in six

areas, namely, employment, the people’s basic livelihood, the operations of market

entities, food and energy security, stable industrial and supply chains, as well as the

normal functioning of primary-level governments, so as to create a favorable

monetary and financial environment for securing a decisive victory in building a

moderately prosperous society in all respects.

I. Conducting open market operations in a flexible manner

Maintaining adequate liquidity at a reasonable level in the banking system. In

2020, the PBC closely monitored the liquidity supply and demand in the banking

system and conducted open market operations in a more preemptive, precise, and

timely manner. Besides long-term liquidity injections made through the use of

instruments such as the cut in the required reserve ratio (RRR), central bank lending,

central bank discounts, and the Medium-term Lending Facility (MLF), the PBC

flexibly conducted open market operations, which were centered on the 7-day reverse

repos, so as to maintain adequate liquidity at a reasonable level and to always strike a

balance between liquidity supply and demand. In the meanwhile, the PBC

strengthened market communications, improved the transparency of monetary policy,

and effectively stabilized market expectations through various means, such as posting

in advance the operation plan in the Announcement of Open Market Operations. In Q4,

amid multiple seasonal and market factors affecting liquidity supply and demand, the

PBC appropriately managed the intensity and pace of open market operations and

responded to short-term truculence in a targeted manner. In late December, the PBC

injected cross-year funds through 14-day reverse repo operations to meet market

demand and maintain the stability of market liquidity at year-end.

Guiding market rates to move around the central bank policy rates. In 2020, in

response to the impact of COVID-19, the PBC preemptively guided the downward

movement of policy rates, with both the MLF rate and the reverse repo rate falling by

30 bps, and cut the funding costs for private enterprises and micro and small-sized

businesses (MSBs) through the transmission of the loan prime rate (LPR). In the

second half of the year, both the MLF rate and the reverse repo rate remained

unchanged, demonstrating a sound monetary policy stance. In the meanwhile, the

PBC improved the continuity of open market operations, steadily sent short-term

policy rate signals through daily operations, and guided short-term money market

rates to move around the 7-day reverse repo operation rate on the open market within

a reasonable range. The MLF rate, as the medium-term policy rate, has obvious

guiding effects on medium and long-term market rates. In December, both interest

rates on interbank CDs and yields on government bonds declined and converged

toward the MLF rate.

To judge the trend of short-term interest rates, we need to determine whether policy

rates have changed in the first place, especially whether the 7-day reverse repo rate of

the central bank’s open market operations has changed, and to avoid paying excessive

attention to the number of open market operations. The number of open market

operations is flexibly adjusted in accordance with temporary factors, such as public

finance and cash as well as market demand. Its change does not fully reflect the trend

in market rates, nor does the change represent a change in the central bank policy rate.

Second, when observing market rates, we need to focus on the weighted average of

DR007, which is the main indicator of market rates, and the average of DR007 over a

period of time, rather than the transaction rate of an individual institution or the

interest rate at a certain point of time, which may be disturbed by short-term factors.

Figure 3 Convergence of Interest Rates on Interbank CDs and Yields on

Government Bonds Toward the MLF Rate

Continuously conducting central bank bill swap (CBS) operations. In Q4 2020,

the PBC conducted CBS operations three times, with the total amount registering

RMB15 billion. The maturity of each operation was three months, at a fixed rate of

0.1 percent. In 2020, the PBC conducted CBS operations once in each month, totaling

RMB61 billion. The CBS operations played a positive role in improving liquidity in

the secondary market of bank-issued perpetual bonds and in supporting the issuance

of perpetual bonds to replenish capital by banks, especially small and medium-sized

banks, and hence strengthened the capability of the financial sector to serve

development of the real economy.

Issuing central bank bills in Hong Kong on a regular basis. In Q4 2020, the PBC

issued three batches of RMB-denominated central bank bills in Hong Kong, totaling

RMB35 billion. Specifically, the 1-year, 3-month, and 6-month bills registered

RMB15 billion, RMB10 billion, and RMB10 billion, respectively. In 2020, the PBC

issued in Hong Kong twelve batches of RMB-denominated central bank bills, totaling

RMB155 billion. The regular issuance of RMB-denominated central bank bills in

Hong Kong not only enriched RMB investment products and RMB liquidity

management tools in the Hong Kong market but also drove both domestic and

overseas market entities to issue RMB-denominated bonds and to conduct RMB

business in the offshore market, thus promoting the sustainable and sound

development of the offshore RMB market. On January 27, 2021, Bank of China

(Hong Kong) Limited launched a market-making mechanism for the

RMB-denominated central bank bills repo business, fostering liquidity in the

secondary market of RMB-denominated central bank bills in Hong Kong. According

to statistics, in 2020, offshore RMB bond issuances, other than the RMB-denominated

central bank bills issued in Hong Kong, exceeded RMB130 billion, a year-on-year

increase of 30 percent. Moreover, with the how and where to issue RMB bonds

offshore increasingly diversified, the RMB offshore market saw more brisk

transactions.

Figure 4 Volume of Spot Transactions of Bank-issued Perpetual Bonds

II. Timely conducting Medium-term Lending Facility and Standing Lending

Facility operations

Well-timed MLF operations were conducted. An appropriate supply of medium-

and long-term liquidity was ensured, giving full play to the signaling and guiding

functions of the mid-term policy rate. In 2020, the PBC conducted a total of RMB5.15

trillion of MLF operations, all with a maturity of one year. In particular, the amount of

MLF operations posted RMB0.6 trillion, RMB0.4 trillion, RMB1.7 trillion, and

RMB2.45 trillion in Q1, Q2, Q3 and Q4 respectively. At the end of the year, the

outstanding MLF registered RMB5.15 trillion, RMB1.46 trillion more than that at the

beginning of the year. The MLF operations were conducted by bidding, with the rate

of February 17, 2020 posted 3.15 percent, down 10 basis points, and the rate of April

15, 2020 posted 2.95 percent, a further drop of 20 basis points.

Standing Lending Facility (SLF) operations were conducted in a timely manner.

The demand for short-term liquidity by locally incorporated financial institutions was

met in the full amount. In 2020, the PBC conducted a total of RMB186.2 billion SLF

operations, of which RMB102.7 billion, RMB48.7 billion, RMB6 billion, and

RMB28.8 billion SLF operations were conducted in Q1, Q2, Q3 and Q4 respectively.

At the end of the year, the balance of SLF operations registered RMB19.8 billion. The

SLF played a role as the ceiling of the interest rate corridor, thus promoting the

smooth operation of the money market. The rates for SLF operations were reduced by

30 basis points in Q2. After the cut, the overnight, 7-day, and 1-month SLF rates were

3.05 percent, 3.20 percent, and 3.55 percent respectively.

III. Enhancing monetary and credit support to offset the impact of the

COVID-19 pandemic

To coordinate regular pandemic containment and economic and social development,

the intensity, pace and focus of monetary policy adjustments were properly managed

based on the different features at each stage. Policy measures were implemented in a

more targeted and direct manner, with the aim of ensuring stability on six fronts and

maintaining security in six areas. The efforts to provide financial support to stabilize

businesses and secure employment have achieved the expected results.

Macro policies were enhanced in a timely manner to offset the impact of the

pandemic. In 2020, RMB1.7 trillion of short-term liquidity was provided to the

financial market when it reopened after the Spring Festival holiday, which effectively

stabilized market expectations. The three rounds of RRR cuts in 2020 released

RMB1.75 trillion of long-term funds. By means of RRR cuts, MLF operations, and

open market operations, liquidity was kept adequate at a reasonable level, thereby

safeguarding the stable movement of market rates and creating a favorable liquidity

environment for the issue of special central government and local government bonds.

The policies of RMB1.8 trillion of central bank lending and central bank

discounts were rolled out and put into place, with a multi-level and multi-tier

approach. In 2020, the PBC rolled out RMB300 billion of special central bank

lending, RMB500 billion quota of central bank lending and central bank discounts,

and RMB1 trillion quota of central bank lending and central bank discounts in three

rounds, with a total amount of RMB1.8 trillion, in support of pandemic containment,

the resumption of work and production, as well as the development of the real

economy, including micro, small and medium-sized enterprises (MSMEs). By

end-June 2020, the RMB300 billion quota of special central bank lending was used up,

supporting relevant banks to issue a cumulative RMB283.4 billion of preferential

loans to a total of 7,597 nationwide and local key enterprises, with a weighted average

interest rate of 2.49 percent. The actual financing costs for enterprises dropped to 1.25

percent after a 50-percent fiscal subsidy on the loan interest. The special central bank

lending policy vigorously eased the shortage of medical supplies at the beginning of

the outbreak and fostered the normal supply of daily necessities in key areas during

the pandemic. The RMB500 billion quota of central bank lending and central bank

discounts was used up, supporting locally incorporated banks to issue a cumulative

RMB498.3 billion of preferential loans to around 590,000 enterprises, with a

weighted average interest rate of 4.22 percent, which effectively addressed the

pressing problems of debt repayment, turnover of capital, and expansion of financing

in face of the resumption of work and production. In December 2020, the RMB1

trillion quota of inclusive central bank lending and central bank discounts was

allocated, supporting locally incorporated banks to support around 1,580,000

enterprises, with a weighted average interest rate of 4.67 percent. These policies

boosted a sense of gain in the real sector, accelerated the resumption of work and

production, and improved the job market.

With highlighted characteristics of directness and precision, two

monetary-policy instruments directly supporting the real economy were

proactively promoted, with the aim of bolstering the development of MSMEs. By

end 2020, the principal and interest repayments on loans of RMB7.3 trillion had been

deferred by banking financial institutions across the country. The instrument in

support of deferred repayments on inclusive MSB loans operated on a monthly basis,

providing a cumulative RMB8.7 billion of incentive funds to locally incorporated

banks and supporting deferral of the principal on a total of RMB873.7 billion

inclusive MSB loans from June to December. The weighted average time extension

registered 12.8 months, easing the temporary pressures on MSBs to repay the loan

principal and interest. In 2020, a total of RMB3.9 trillion of inclusive unsecured loans

for MSBs were provided by banking financial institutions, RMB1.6 trillion more than

that in 2019. The support scheme for inclusive unsecured loans for MSBs operated on

a quarterly basis, providing a cumulative RMB170 billion of preferential funding to

locally incorporated banks and supporting a total of RMB480.8 billion in unsecured

loans for MSBs from March to December, effectively alleviating the financing strains

on MSBs.

In line with the arrangements decided by the executive meeting of the State Council

on extending the policies of deferred repayments on inclusive MSB loans and the

support scheme of inclusive unsecured loans for MSBs, on December 31, 2020, the

PBC, jointly with the China Banking and Insurance Regulatory Commission (CBIRC),

Ministry of Finance (MOF), the National Development and Reform Commission

(NDRC), and Ministry of Industry and Information Technology (MIIT), issued

the Notice on Extending the Policies of Deferred Repayments of Principal and

Interest on Inclusive Loans for Micro and Small Businesses and the Support Scheme

of Inclusive Unsecured Loans for Micro and Small Businesses (Yinfa No.324 [2020]),

extending the two policies until March 31, 2021. First, the policy of deferred

repayments of principal and interest on inclusive loans to MSBs was extended.

Repayment of all the inclusive MSB loans eligible for this policy could be deferred

based on market principles, and banks and enterprises could discuss the relevant terms.

For inclusive MSB loans with a deferred repayment period of no less than 6 months

that are issued by locally incorporated financial institutions, the PBC provides

incentive funding of 1 percent of the loan principal. Second, the support scheme of

inclusive unsecured MSB loans was extended. For inclusive unsecured MSB loans

that are newly issued by eligible locally incorporated financial institutions, the PBC

provides favorable funding for 40 percent of the loan principal.

IV. Lowering the Required Reserve Ratio for financial institutions

In 2020, the PBC launched three rounds of RRR cuts for financial institutions and

lowered the interest rate on excess reserves in an attempt to support the economic

recovery. In January 2020, the PBC reduced the RRR for financial institutions

(excluding finance companies, financial leasing companies, and auto finance

companies) by 0.5 percentage points releasing over RMB800 billion of long-term

funds. In March, the PBC implemented a targeted RRR cut for inclusive finance. For

banks that met the criteria for loan issuances for inclusive finance in 2019, the PBC

granted a preferential RRR cut of 0.5 or 1.5 percentage points. Moreover, joint-stock

commercial banks that received a 0.5-percentage-point RRR cut according to this

assessment would enjoy an additional RRR cut of 1 percentage point. These two

measures released about RMB550 billion of long-term funds in total, and guided

financial institutions to expand loan issuances for inclusive finance. In April, the PBC

announced a RRR cut of 1 percentage point for rural commercial banks, rural

cooperative banks, rural credit cooperatives, village banks, and city commercial banks

operating solely within their provincial-level administrative regions. The measure was

implemented in two phases, under which cuts were carried out on April 15 and May

15 respectively. About RMB400 billion of long-term funds were freed up by the cuts.

Meanwhile, the interest rate on excess reserves deposited in the central bank by

financial institutions was lowered from 0.72 percent to 0.35 percent. All the

above-mentioned measures contributed to broadening long-term and stable funding

sources for financial institutions, improving their efficiency in the use of funds, and

boosting their credit support for MSMEs as well as for industries and firms that were

seriously hit by the pandemic.

V. Further improving the macro-prudential policy framework

The mechanism of a countercyclical capital buffer was established. In September

2020, the PBC and CBIRC jointly issued the Notice on Establishing the Mechanism

of Countercyclical Capital Buffer (Yinfa No. 233 [2020]), stipulating the

establishment of the mechanism of countercyclical capital buffer and setting the initial

countercyclical capital buffer ratio at zero. The mechanism will contribute to the

sound business operation of banking institutions and safeguard the stability of China’s

financial system.

A regulatory framework for financial holding companies (FHCs) was

preliminarily set up. In September 2020, the PBC released the Trial Measures on the

Regulation of Financial Holding Companies (Order No. 4 [2020] of the People’s

Bank of China), which entered into effect from November 2020. The Measures

specify law-based market access for FHCs that are invested in and controlled

by non-financial companies. The capital, behavior, and risk of FHCs shall be

regulated in an all-round, continuous, and look-through manner, so as to effectively

isolate the FHCs’ real economic activities from their financial activities and to prevent

cross-organization, cross-industry, or cross-market risk contagion.

The regulatory framework for systemically important financial institutions was

improved. On December 3, 2020, the PBC and the CBIRC jointly

released the Measures for Assessment of Systemically Important Banks (SIBs) (Yinfa

No. 289 [2020]). The Measures specify the indicators, procedures, and work division

in the assessment of SIBs in China, and they establish the basis for SIB identification.

A management system for real estate loan concentration for banking institutions

was established. In December 2020, the PBC, jointly with CBIRC, issued the Notice

on Establishing a Management System for Real Estate Loan Concentration for

Banking Institutions (Yinfa No.322 [2020]), which set up a management system for

real estate loan concentration and specified the ceiling proportions of real estate loans

and personal housing loans in the total loans of banking institutions. The system will

contribute to strengthening the resilience and soundness of the financial system,

promoting steady and healthy development of the real estate market, enhancing the

banking institutions’ internal constraints, improving the credit structure, and fostering

balanced development of the financial sector, the real estate sector, and the real

economy.

The role of the macro-prudential assessment (MPA) was effectively brought into

play to optimize the credit structure and to promote the supply-side structural

reform of the financial sector. Since the beginning of 2020, in line with the

requirements for key tasks set at the Central Economic Work Conference, the PBC

further improved the MPA, optimized the credit structure, and reduced financing costs.

First, the weight of financing to MSBs and private enterprises as well as the

manufacturing sector was increased in bank assessments, and “use of central bank

lending” was introduced as a temporary assessment indicator. These measures guided

financial institutions to enhance their support for the key areas and weak links in the

national economy and secured incremental financing flows to the manufacturing

sector and MSMEs. Second, the PBC improved the assessment of the use of the LPR,

released the potential of LPR reform in reducing loan interest rates, encouraged banks

to accelerate the shift in the pricing benchmark for outstanding floating-rate loans,

and pushed ahead with a marked decline in the overall financing costs for enterprises.

The macro-prudential adjustment parameter for cross-border financing was

adjusted. On March 11, 2020, the PBC and the State Administration of Foreign

Exchange (SAFE) released the Notice on Adjusting the Macro-prudential Adjustment

Parameter for Cross-border Financing (Yinfa No. 64 [2020]), increasing the

parameter from 1 to 1.25. In order to improve the macro-prudential management of

overall cross-border financing and to guide financial institutions to adjust their asset

and liability structure of foreign exchange in a market-based manner, the PBC and the

SAFE decided to lower the macro-prudential adjustment parameter for financial

institutions’ cross-border financing to 1 from 1.25 on December 11, 2020. In addition,

the PBC and the SAFE released the Notice on Adjusting the Macro-prudential

Adjustment Parameter for Cross-border Financing (Yinfa No. 5 [2021]), lowering the

macro-prudential adjustment parameter for cross-border financing of enterprises to 1

from 1.25 on January 7, 2021.

The foreign exchange risk reserve ratio was adjusted when appropriate. Since the

beginning of 2020, the RMB exchange rate experienced two-way floating based on

market supply and demand amid strengthened flexibility, stable market expectations,

orderly cross-border capital flows, stable performance in the foreign exchange market,

and balanced market demand and supply. As a result, the PBC decided to reduce the

foreign exchange risk reserve ratio for forward foreign exchange sales from 20

percent to zero, effective from October 12, 2020.

VI. Actively leveraging the role of structural monetary policy instruments

The PBC actively used central bank lending to support rural development,

central bank lending for MSBs, central bank discounts, pledged supplementary

lending (PSL), and other tools to guide financial institutions to step up support

for key areas and weak links in the national economy, such as MSBs, private

firms, agriculture, rural areas, and rural people as well as poverty alleviation.

Good use was made of central bank lending for special poverty alleviation projects to

increase credit supply to the “three autonomous regions”, i.e., Tibet, the four

prefectures in southern Xinjiang, the areas in four provinces with large Tibetan

populations, and the “three autonomous prefectures”, i.e., Linxia in Gansu, Liangshan

in Sichuan, and Nujiang in Yunnan, to lower the financing costs in these areas as well

as to achieve targeted poverty alleviation. In the four quarters of 2020, central bank

lending for special poverty alleviation projects was issued in the amounts of RMB6.3

billion, RMB8.0 billion, RMB7.2 billion, and RMB7.9 billion, respectively, with the

balance recording RMB37.0 billion at end-2020. At end-2020, outstanding central

bank lending to support rural development registered RMB457.2 billion. Outstanding

central bank lending for MSBs and for poverty alleviation posted RMB975.6 billion

and RMB215.3 billion, respectively. Outstanding central bank discounts registered

RMB578.4 billion. In 2020, the PBC made a net withdrawal of PSLs in the amount of

RMB302.3 billion from policy and development banks, with the net withdrawal in Q4

totaling RMB199.3 billion and the outstanding PSL registering RMB3.2350 trillion at

end-2020.

Targeted Medium-term Lending Facility (TMLF) operations were conducted.

The TMLFs provided a stable and long-term funding source for financial institutions

to expand their credit supply to MSBs and private firms with preferential interest rates.

In the first quarter of 2020, the PBC conducted one-year TMLF operations totaling

RMB240.5 billion, with a rate of 3.15 percent. In the second quarter, the PBC

conducted one-year TMLF operations totaling RMB56.1 billion, with a rate of 2.95

percent. The TMLFs maturing in Q3 were rolled over in the form of MLFs. In the

fourth quarter, the PBC did not conduct any TMLF operations. At end-2020, the

outstanding TMLFs totaled RMB296.6 billion.

Box 2 Boosting Green Finance to Reach a Carbon Emissions Peak and

Achieve Carbon Neutrality

In 2020, General Secretary Xi Jinping announced at the General Debate of the 75th

Session of the United Nations General Assembly that China would strive to reach a

carbon emissions peak by 2030 and to achieve carbon neutrality by 2060. It was

required at the Fifth Plenary Session of the 19th CPC Central Committee and

the Central Economic Work Conference that efforts should be made to accelerate

green and low-carbon development and to make good progress in reaching a carbon

emissions peak and carbon neutrality. Centering around the objectives of peak carbon

emissions and carbon neutrality, the PBC will deliver a sound overarching design and

plan for green finance, give play to the three functions of finance to support green

development, and gradually improve the five pillars of the green finance system.

I. Bringing into play the three major functions of finance to support green

development

Green finance refers to economic activities aimed at supporting improvements in the

environment, mitigating climate change, and high-efficiency utilization of resources.

It means providing financial services for the funding and investment, project

operation, and risk management of programs concerning environmental protection,

energy conservation, clean energy, green transport, and green building. Centering

around the goals of a carbon emissions peak and carbon neutrality, work should be

done to further focus on carbon emissions reductions, to give full play to the role of

resource allocations, and to manage well the risks related to climate change in the

process of developing green finance. In addition, efforts should be made to promote

carbon price discovery under the constraints of carbon neutrality and to guide the

financial system to allocate more resources to green and low-carbon areas.

First, full play should be given to resource allocations. Currently, fossil fuels account

for a large share of the total energy consumption in China. With the aim of achieving

a carbon emissions peak and carbon neutrality, the proportion of fossil fuel against

total energy consumption needs to gradually decline. Therefore, great efforts must be

made to promote the development of renewable resources, such as wind and solar

power, and to conserve energy and reduce carbon emissions in the areas of electricity,

industry, architecture, and transportation. Meanwhile, development of technologies

such as carbon capture and storage should be further supported. In order to promote

the development of green finance to focus on green and low-carbon areas, a variety of

policy measures, such as monetary policies, credit policies, regulatory policies,

compulsory disclosures, green evaluations, self-regulation, and product innovations

should be adopted so as to guide and allocate more financial resources to green

innovation projects in terms of clean energy, green transformation, and carbon capture

and storage.

Second, there should be proper management of risks related to climate change. In the

future, constraints on carbon emissions will be strengthened notably, incurring risks to

the transformation of the high-carbon industries. The frequent occurrence of natural

disasters caused by climate change will also have an impact on various fields. Various

means such as pressure tests on climate risks and environmental and climate risk

analyses should be adopted to enhance the financial system’s capability to manage the

risks related to transformation and climate change.

Third, carbon price discovery will be promoted under the constraint of carbon

neutrality. Centering around the objective of carbon neutrality, it is necessary to set

carbon emissions quotas with strong binding force. Construction of a national carbon

emissions trading market will be promoted, along with related financial product and

trading mechanism designs so as to promote market discovery of a reasonable carbon

price under the carbon emissions constraints.

II. Gradually improving the five major pillars of a green finance system

To give play to the three major functions of finance in support of green development,

the five major pillars of a green finance system should be gradually improved.

First, continue building a standard system for green finance. China is already taking

the lead in terms of setting the standards for green finance, but these standards have

yet to be gradually unified domestically as well as to be compatible with international

practices. We can start with trials of national standards and industrial standards for

green finance so as to promote regulated development of green finance and to

accumulate valuable experience for promoting nationwide green finance standards

that is feasible for banks and beneficial to enterprises.

Second, improve supervision of financial institutions and the requirements for

information disclosure. Gradually establish a system of climate and environmental

information disclosures for financial institutions and guide more investment toward

environment friendly enterprises, such as those that are green and low-carbon.

Third, establish a policy incentive and constraint mechanism. Performance

evaluations of green finance should be periodically conducted for financial

institutions. The feasibility of setting differentiated risk weights for green and brown

assets should be studied. The PBC will comprehensively adopt a variety of monetary

policy tools to guide financial institutions to step up credit support to the green and

low-carbon sectors.

Fourth, continuously improve green financial products and the relevant market system.

As of end-Q3 2020, outstanding green loans denominated in RMB and foreign

currencies in China posted over RMB11 trillion, ranking first in the world. Full play

will be given to the market mechanism. By means of innovating products and tools,

enhancing pricing rationality, and strengthening environmental risk management, the

PBC will continue to encourage products including green credit, green bonds, and

green funds, build a carbon trading market, and develop carbon futures.

Fifth, strengthen international cooperation on green finance. Continue to deepen

international cooperation in green finance under multilateral frameworks, such as the

G20, the Central Banks, and the Supervisors Network for Greening the Financial

System (NGFS), and the “Belt and Road”, as well as under bilateral frameworks

between China and Europe, China and the United Kingdom, China and France, etc.

Going forward, the PBC will follow the arrangements of the CPC Central Committee

and the State Council, focus on the three major functions and five pillars of green

financial development, and improve the policy framework and the incentive and

constraint mechanisms for green finance. It will utilize structural monetary policy

instruments and guide financial institutions to support green and low-carbon

development in accordance with market-oriented principles so as to achieve the

objectives of peak carbon and carbon neutrality.

VII. Bringing into play the role of credit policy in guiding structural reform

Oriented by high-quality development, the PBC guided financial institutions to

continuously step up support to key areas and weak links in the national economy,

enhanced financial support for market entities impacted by COVID-19, and focused

on keeping businesses and employment stable. It also provided powerful support to

achieve the goal of winning the battle against poverty and to complete the building of

a moderately prosperous society in all respects.

Emphasis was placed on providing financial support to keep businesses and

employment stable. Financial services were continuously improved, promoting MSB

financing featuring “increased volume, lowered price and expanding coverage”. The

PBC enhanced support for medium and long-term loans to the manufacturing sector to

promote its high-quality development. The PBC implemented the policy of deferred

repayments for inclusive loans to MSBs, and provided support for unsecured inclusive

loans to MSBs, and work was done to ensure the continuation and reasonable

adjustment of policy so as to invigorate market entities and stabilize market

expectations. By focusing on key groups and key businesses, the PBC conducted a

variety of innovative activities connecting government agencies, banks, and

businesses to enable more effective and better-matched financing.

No efforts were spared in providing targeted financial support for completing

the task of poverty alleviation. The PBC focused on the deeply impoverished

regions and the counties listed for supervision of poverty relief. Financial support was

enhanced for industrial development used as a means of poverty alleviation and for

relocation of impoverished residents. The quality of basic financial services in the

poverty-stricken areas was improved, with all the impoverished counties lifted out of

poverty. In addition, the PBC promoted the improvement of corresponding regulatory

mechanisms for financing poverty alleviation, concentrated on preventing and

resolving relevant risks, and cooperated with the census on poverty elimination,

thereby facilitating high-quality and sustainable poverty alleviation.

More resources were allocated to support the rural revitalization strategy. The

PBC arranged special quotas of central bank lending to support rural development and

supported bank issuance of more loans to expand pig farming. Financial services were

improved for spring plough and farming preparations, and for agricultural investment.

Work was done to optimize financial services for reform of the rural property rights

system, to develop the collective economy, and to promote the collateralization of

operational rights of contracted farmland.

VIII. Further deepening the market-based interest rate reform

Since the beginning of 2020, the PBC has smoothed the transmission of monetary

policy by means of reforms. With continued progress in the LPR reform, the

financing costs of enterprises have witnessed an obvious decline. First, taking a

forward-looking view, the PBC guided the open market operation (OMO) rates and

the MLF rates to move downward by 30 basis points, driving down the one-year LPR

by 30 basis points. Accordingly, the overall market rates and loan rates went

downward, supporting the reasonable growth of loan demand. In December, the

weighted average rate on corporate loans posted 4.61 percent, down by 0.51

percentage points from the previous December and hitting a record low for two

consecutive months. Second, use of the LPR was further promoted. Starting from

January 1, 2020, newly-issued loans no longer took the benchmark loan rates as their

pricing reference. During the period from March to August 2020, the shift in the

pricing benchmark for outstanding floating-rate loans was completed in line with

market-oriented and law-based principles. As of end-August, 92.4 percent of

outstanding loans had completed the shift in the pricing benchmark. Banks were

urged to incorporate the LPR into the funds transfer pricing (FTP) of loans,

fundamentally removing the implicit floor of loan rates. Accordingly, more financial

resources were guided to be allocated to MSBs and private enterprises, and the actual

loan rates declined. Third, the market-oriented reform of credit-card overdraft interest

rates was promoted. The credit-card overdraft interest rates were determined by

negotiations between credit-card issuers and cardholders from January 1, 2020, with

the caps and floors removed. Administrative controls on credit-card overdraft interest

rates were lifted and market-oriented pricing was completely achieved, which was

conducive to promoting market competition and urging card issuers to improve

services. Fourth, the self-regulatory mechanism for interest rates was strengthened,

promoting explicit indications of annualized loan rates. Special membership was set

up and micro-credit companies were included into the scope of interest rate

self-regulation so as to improve the self-regulatory mechanism for market-rate pricing.

Fifth, the benchmark deposit interest rates continued to play their role as the “ballast”

for the overall interest rate system in China. Efforts were made to strengthen the

self-regulation of deposit interest rates, to reduce irregular innovative deposit products,

and to maintain competitive order in the deposit market. The LPR reform promoted

optimization of the financial structure, smoothed the internal pricing mechanism of

banks, and effectively promoted the market-based reform of deposit rates, as indicated

by the overall decline of deposit rates.

IX. Improving the market-based RMB exchange rate formation mechanism

The PBC continued to advance the market-based reform of the RMB exchange rate

regime and to improve the managed floating exchange rate regime based on market

supply and demand with reference to a basket of currencies. It maintained the

flexibility of the exchange rate and gave play to the role of the exchange rate as an

automatic stabilizer in adjusting the macro economy and the balance of payments.

The PBC attached importance to guiding expectations and kept the RMB exchange

rate basically stable at an adaptive and equilibrium level.

In 2020, the highest and lowest CNY central parities were 6.5236 and 7.1316,

respectively, against the USD. During the 243 trading days, the RMB appreciated on

140 days and depreciated on 103 days. The biggest intraday appreciation and

depreciation were 1.00 percent (670 bps) and 0.76 percent (530 bps), respectively.

The RMB exchange rates against other major international currencies floated in two

ways. At end-2020, the central parities of the RMB against the dollar, the pound. and

the Japanese yen had appreciated 6.92 percent, 2.92 percent, and 1.34 percent,

respectively, from end-2019, while the RMB central parity had depreciated 2.61

percent against the euro during the same period of time. Since the reform of the RMB

exchange rate formation mechanism commenced in 2005, the RMB had appreciated

by a cumulative total of 26.84 percent, 24.79 percent, and 15.53 percent, respectively,

against the dollar, the euro, and the Japanese yen through end-December, 2020. Direct

RMB trading was buoyant in the interbank foreign exchange market with stable

liquidity, which helped lower the exchange costs of micro economic entities and to

facilitate bilateral trade and investment.

Table 8 Trading Volume of the RMB Against Other Currencies in the Interbank

Foreign Exchange Spot Market in 2020

Unit: RMB100 million

Currency

USD

EUR

JPY

HKD

GBP

AUD

NZD

Trading

volume

553205.22

14194.95

2733.76

1456.62

586.77

588.75

214.39

Currency

SGD

CHF

CAD

MYR

RUB

ZAR

KRW

Trading

volume

840.00

134.80

337.00

5.04

143.69

1.75

61.52

Currency

AED

SAR

HUF

PLN

DKK

SEK

NOK

Trading

volume

8.92

21.68

15.83

15.97

54.66

28.11

11.25

Currency

TRY

MXN

THB

KHR

KZT

MNT

Trading

volume

9.50

9.11

358.88

0.06

0.02

Source: China Foreign Exchange Trade System.

As of end-December, under the bilateral currency swap agreements between the PBC

and foreign monetary authorities, the foreign monetary authorities utilized a total of

RMB50.032 billion, and the PBC utilized foreign currencies equivalent to USD516

million. These operations played an active role in promoting bilateral trade and

investment.

X. Promoting the resolution of financial risks in a prudent and orderly manner

and deepening the reform of financial institutions

Resolution of high-risk small and medium-sized financial institutions was carried

out smoothly. The PBC strove to ease the impact of the pandemic and achieved

crucial progress and important initial results in the resolution of high-risk small and

medium-sized financial institutions. The reform and restructuring plans of key

financial institutions, including Hengfeng Bank and Jinzhou Bank, were carried out

smoothly to ensure the sound operation of the financial system during the critical and

sensitive period and to firmly safeguard the bottom line that no systemic risks should

occur.

Risk resolution of Baoshang Bank (BSB) was advanced steadily and orderly. The

reform and restructuring of BSB has been progressing smoothly, and Mengshang

Bank and Huishang Bank, which have entered into the purchase and assumption

process with BSB, are abundant in capital and operating smoothly. As BSB has

become seriously insolvent and has failed to repay debts that came due, the takeover

group filed a bankruptcy petition with the CBIRC in the name of the troubled bank

and the regulator has approved the bank’s application to enter into bankruptcy

procedures. On November 23, 2020, the Beijing No.1 Intermediate People’s Court

ruled to accept the bankruptcy and liquidation petition of BSB, and it appointed the

BSB liquidation group as the administrator. Up to now, the work on BSB bankruptcy

and liquidation has been progressing steadily and orderly.

Reform of development and policy financial institutions was continuously

deepened. The PBC advanced the reform plans for development and policy financial

institutions across the board to redefine their responsibilities and the scope of their

business, improve corporate governance, strengthen the constraint and incentive

mechanism, and prevent financial risks. The PBC guided development and policy

financial institutions to fulfill their responsibilities, focus on their main business, and

give full play to their role in supporting economic restructuring and high-quality

development, thus better serving the national development strategies.

XI. Deepening the reform of foreign exchange arrangements

Two-way opening-up of the financial market was pushed forward. First, the pilot

quota of Qualified Domestic Limited Partner (QDLP) and Qualified Domestic

Investment Enterprise (QDIE) was increased to USD10 billion in Shanghai, Beijing,

and Shenzhen. Second, Hainan Free Trade Port and the city of Chongqing were added

to the QDLP pilot program, with a quota of USD5 billion in each area.

Facilitation of receipts and payments for trade was boosted. First, the pilot

program for facilitating foreign exchange receipts and payments for trade was

expanded to cover more areas in a steady and orderly manner. Second, outbound

foreign exchange payments under trade in services became more convenient. On

November 1, 2020, online verification services for tax registration of foreign

exchange payments under trade in services were launched for trial operation

nationwide. Third, to facilitate individuals’ foreign exchange business under the

initiative of “going global”. The pilot program was expanded for online processing of

foreign exchange sales and purchases for overseas studies which are not part of the

annual quota for foreign exchange purchases by individuals. Fourth, to improve the

environment for foreign exchange business after “bringing in”. The pilot programs for

facilitating small-value consumption by foreign individuals and for facilitating foreign

exchange purchases and payments for the income of foreign top-level talents in China

were promoted.

Administration of the foreign exchange market was strengthened. With regular

pandemic containment measures remaining in place, efforts were made to coordinate

pandemic containment with financial risk prevention and mitigation. Monitoring and

analysis of potential risks incurred in cross-border fund flows were strengthened.

Emphasis was placed on cracking down on illegal financial activities, such as

underground banks, cross-border gambling, and illegal online foreign exchange

trading so as to ensure stability on six fronts and to maintain security in six areas. In

2020, a total of 2,440 cases violating the laws and regulations of the foreign exchange

administration were handled, with total fines amounting to RMB940 million.

Part 3. Financial Market Conditions

In 2020, the financial market operated smoothly. Market interest rates were basically

stable. The volume of bond issuances and cash bond transactions expanded. The stock

market index picked up and witnessed year-on-year rises in both turnover and the size

of funds raised.

I. Financial market overview

1. Money market transactions were active with stable interest rates

Liquidity in the banking system was adequate at a reasonable level, and money

market interest rates were stable. In December 2020, the monthly weighted average

interest rate for interbank lending and pledged repos posted 1.3 percent and 1.36

percent, respectively, down 79 basis points and 74 basis points, respectively, from

December 2019. The monthly weighted average interest rate of government-backed

bond repos among depository institutions posted 1.14 percent, 22 basis points lower

than the monthly weighted average interest rate of pledged repos. At end-2020, the

overnight and 7-day Shibor posted 1.09 percent and 2.38 percent, respectively, down

60 and 36 basis points from end-2019, respectively.

The market saw active repo transactions and interbank lending. In 2020, the volume

of trading of bond repos on the interbank market reached RMB959.8 trillion,

representing an average daily turnover of RMB3.9 trillion and a year-on-year increase

of 17.6 percent. The volume of cumulative trading of interbank lending registered

RMB147.1 trillion, with an average daily turnover of RMB590.9 billion and a

year-on-year decrease of 2.6 percent. In terms of the maturity structure, overnight

repos and overnight lending accounted for 84.7 percent and 90.2 percent, respectively,

of the total turnover in bond repos and interbank lending, decreasing 0.5 percentage

points and 1.2 percentage points year on year. The volume of bond repos traded on the

exchange markets increased 20.3 percent year on year to RMB287.3 trillion.

Table 9 Fund Flows Among Financial Institutions in 2020

Unit: RMB100 million

Repos

Interbank lending

2020

2019

2020

2019

Chinese-funded large

banks

①

-2,711,676

-1,918,715

-405,206

-280,598

Chinese-funded

medium-sized banks

②

-950,665

-744,800

-58,995

-148,506

Chinese-funded

small-sized banks

③

-49,334

132,798

127,947

111,408

Securities institutions

④

1,100,130

861,901

261,702

258,387

Insurance institutions

⑤

122,001

84,960

819

175

Foreign-funded banks

74,489

89,211

-27,072

-21,598

Other financial institutions

and vehicles

⑥

2,415,055

1,494,646

100,806

80,733

Notes ： ①Chinese-funded large banks include the Industrial and Commercial Bank of China,

Agricultural Bank of China, Bank of China, China Construction Bank, China Development Bank,

Bank of Communications, and Postal Savings Bank of China. ②Chinese-funded medium-sized

banks refer to policy banks, China Merchants Bank, and the eight other joint-equity commercial

banks, Bank of Beijing, Bank of Shanghai, and Bank of Jiangsu. ③Chinese-funded small-sized

banks refer to Hengfeng Bank, China Zheshang Bank, China Bohai Bank, other city commercial

banks, rural commercial banks, rural cooperative banks, private banks, and village and township

banks. ④Securities institutions include securities firms, fund management companies, and futures

companies. ⑤Insurance institutions include insurance firms and corporate annuities. ⑥Other

financial institutions and vehicles include urban credit cooperatives, rural credit cooperatives,

finance companies, trust and investment companies, financial leasing companies, asset

management companies, social security funds, mutual funds, wealth management products, trust

plans, and other investment vehicles. Some of these financial institutions and vehicles do not

participate in the interbank lending market. ⑦A negative sign indicates net lending and a positive

sign indicates net borrowing.

Source: China Foreign Exchange Trade System.

Interbank Certificates of Deposit (CD) and negotiable CD businesses operated

steadily. In 2020, around 29,000 interbank CDs were issued on the interbank market,

raising RMB19.0 trillion. The volume of trading on the secondary market totaled

RMB167.3 trillion. At end-2020, outstanding interbank CDs reached RMB11.2

trillion. Around 52,000 negotiable CDs was issued by financial institutions in 2020,

raising RMB9.7 trillion, a decrease of RMB2.3 trillion year on year. In 2020, the

average weighted interest rate of 3-month interbank CDs was 2.60 percent, 20 basis

points higher than that of the 3-month Shibor.

Interest rate swap transactions witnessed steady growth. In 2020, the RMB interest

rate swap market witnessed 274,000 transactions, increasing 15.3 percent year on year,

with the volume of the notional principal totaling RMB19.6 trillion, an increase of 7.8

percent year on year. In terms of the maturity structure, contracts with maturities of up

to one year traded most briskly and the volume of the notional principal posted

RMB12. 5 trillion, accounting for 63.8 percent of the principal of all maturities. The

7-day fixing repo rate and the Shibor served as the main reference rates for the

floating leg of the RMB interest rate swaps, accounting for 82.7 percent and 14.9

percent, respectively, of the total notional principal of the interest rate swaps. In 2020,

interest rate swaps anchored to the LPR witnessed 1,718 transactions, with RMB266.5

billion of the notional principal.

Table 10 Transactions of Interest Rate Swaps in 2020

Transactions

Notional principal (RMB100 million)

2020

274,029

195,564.6

2019

237,654

181,394.2

Source: China Foreign Exchange Trade System.

The loan prime rate (LPR) interest rate option business developed steadily. After the

LPR interest rate option business made its debut on the interbank market on March 23,

2020, it has attracted participation by a variety of market players, covering large

commercial banks, joint-stock commercial banks, city commercial banks, rural

commercial banks, foreign-funded banks, securities companies, and so forth. At

end-2020, a total of 484 interest rate option transactions were concluded, adding up to

RMB90.75 billion. Specifically, 126 LPR interest rate swap transactions were

concluded, amounting to RMB14.35 billion of the notional principal, and 358 were

LPR interest rate cap/floor transactions, amounting to RMB76.4 billion of the

notional principal.

2. Bond financing costs decreased on the whole, and transactions and issuances

of cash bonds expanded

Bond market yields went down first and then picked up, with credit spreads widening.

Government securities yields decreased continuously from January to April 2020, and

have rebounded since then. At end-2020, the yields on 1-year and 10-year government

securities increased by 11 basis points and 1 basis point, respectively, from end-2019.

Credit spreads on 3-year AAA and AA-rated short-to-medium-term bills expanded by

3 basis points and 52 basis points year on year, respectively.

Figure 5 Yield Curves of Government Securities on the Interbank Market

Source: China Central Depository & Clearing Co., Ltd.

The costs of financing through the issuance of bonds decreased. In 2020, the average

coupon rate of 10-year government securities issued by the Ministry of Finance was

2.93 percent, 24 basis points lower than the rate in 2019. The average coupon rate of

10-year financial bonds issued by China Development Bank was 3.31 percent, 26

basis points lower than the rate in 2019. The average rate of 1-year short-term

financing bills (bond rating A-1) issued by AAA-rated non-financial enterprises was

2.82 percent, 58 basis points lower than the rate in 2019.

The volume of cash bond transactions on the interbank market maintained growth and

that on the stock exchanges witnessed a significant increase. In 2020, the value of

cash bonds trading on the bond market posted RMB253 trillion, registering an

increase of 16.5 percent year on year. Specifically, the value of bond trading on the

interbank market was RMB232.8 trillion, representing an increase of 11.5 percent

year on year. The value of bond transactions on the stock exchanges totaled RMB20.2

trillion, an increase of 141.6 percent year on year. The value of bond lending

transactions stood at RMB7.5 trillion, an increase of 61.6 percent year on year.

Bond issuances saw year-on-year growth. In 2020, the value of bond issuances

increased by 26 percent, or RMB11.7 trillion, year on year to RMB56.9 trillion, with

government bonds, financial bonds, and corporate debenture bonds increasing by

RMB5 trillion, RMB3.2 trillion, and RMB3.5 trillion, respectively. At end-2020,

outstanding bonds held in custody amounted to RMB116.7 trillion, an increase of 17.9

percent year on year.

Table 11 Bond Issuances in 2020

Unit: RMB100 million

Type of bond

Issuance

YOY change

Government securities

70,855

29,292

Local government bonds

64,438

20,814

Central bank bills

Financial bonds

①

291,539

32,179

Of which: Financial bonds issued by

China Development Bank and

policy financial bonds

Interbank certificates of deposit

51,638

189,720

15,451

10,007

Corporate debenture bonds②

142,012

34,954

Of which: Debt-financing instruments

of non-financial enterprises

91,461

23,385

Enterprise bonds

5,542

286

Corporate bonds

31,322

7,728

Bonds issued by international institutions

554

Total

569,397

117,324

Notes: ①Including financial bonds issued by China Development Bank, policy financial bonds,

bonds issued by commercial banks (including ordinary bonds, subordinated bonds, and hybrid

bonds), bonds issued by securities firms, and interbank certificates of deposit. ② Including

debt-financing instruments issued by non-financial enterprises, enterprise bonds, corporate bonds,

convertible bonds, bonds with detachable warrants, privately offered SME bonds, and

asset-backed securities on the Shanghai Stock Exchange and the Shenzhen Stock Exchange issued

by non-financial enterprises.

Sources: The People’s Bank of China, China Securities Regulatory Commission, and China

Central Depository & Clearing Co., Ltd.

3. Bill financing grew continuously

The bill acceptance business grew continuously. In 2020, commercial drafts issued by

enterprises totaled RMB22.1 trillion, rising 8.4 percent year on year. At end-2020,

outstanding commercial drafts stood at RMB14.1 trillion, increasing 10.7 percent year

on year. In 2020, outstanding commercial draft acceptances rose by RMB1.4 trillion,

and 70.3 percent of the outstanding bankers’ acceptances were issued by micro, small,

and medium-sized enterprises (MSMEs).

Bill financing expanded continuously. In 2020, total discounts by financial institutions

amounted to RMB40.4 trillion, growing 17.7 percent year on year. At end-2020, the

balance of bill financing was RMB8.4 trillion, up 9.7 percent year on year. The

balance accounted for 4.8 percent of the total outstanding loans, 0.1 percentage points

lower year on year.

4. Stock indices soared, with turnover and the amount of funds raised increasing

significantly year on year

Stock indices soared. At end-2020, the Shanghai Stock Exchange Composite Index

closed at 3,473 points, increasing 13.9 percent from end-2019. The Shenzhen Stock

Exchange Component Index closed at 14,471 points, increasing 38.7 percent from

end-2019. Turnover on the stock markets expanded significantly. In 2020, the

combined turnover of the Shanghai Stock Exchange and the Shenzhen Stock

Exchange reached RMB206.8 trillion, and the average daily turnover was RMB851.1

billion, an increase of 63 percent year on year. The amount of funds raised on the

stock markets surged year on year. In 2020, a cumulative RMB1.2 trillion was raised,

increasing 68.6 percent year on year.

5. Growth of premium income slowed down, while growth of assets in the

insurance sector accelerated

In 2020, total premium income in the insurance sector amounted to RMB4.5 trillion,

up 6.1 percent year on year, a deceleration of 6.1 percentage points from 2019. Claim

and benefit payments totaled RMB1.4 trillion, representing a year-on-year increase of

7.9 percent. Specifically, total property insurance claim and benefit payments

increased 7 percent year on year, and total life insurance claim and benefit payments

went up by 8.8 percent year on year.

Table 12 Asset Allocations in the Insurance Sector at End-2020

Unit: RMB100 million, %

Balance

As a share of total assets

End-2020

End-2019

End-2020

End-2019

Total assets

232,984

205,645

100.0

Of which: Bank

deposits

25,973

25,227

11.1

12.3

Investments

190,828

160,043

81.9

77.8

Source: China Banking and Insurance Regulatory Commission.

The growth of assets in the insurance sector accelerated. At end-2020, total assets in

the insurance sector increased 13.3 percent year on year to RMB23.3 trillion, an

acceleration of 1.1 percentage points from end-2019. Specifically, bank deposits and

investment-linked assets increased by 3 percent and 19.2 percent, respectively, year

on year.

6. Foreign exchange transactions rose slightly year on year

In 2020, the cumulative turnover of spot RMB/foreign exchange transactions

registered USD8.4 trillion, an increase of 5.6 percent year on year. The cumulative

turnover of RMB/foreign exchange swap transactions totaled USD16.3 trillion, a

decrease of 0.2 percent year on year. Specifically, cumulative overnight RMB/USD

swap transactions posted USD9.5 trillion, accounting for 57.9 percent of the total

swap turnover. Turnover of RMB/foreign exchange forward transactions totaled

USD104.4 billion, rising 37.4 percent year on year. Turnover in foreign currency pair

transactions totaled USD810.9 billion, rising 70.5 percent year on year. In particular,

the EUR/USD pair registered the largest trading volume, accounting for 57.2 percent

of the total market share.

Participants on the foreign exchange market expanded continuously. At end-2020,

there were 735 members on the foreign exchange spot market, 266 members on the

foreign exchange forward market, 259 members on the foreign exchange swap market,

213 members on the currency swap market, and 163 members on the foreign

exchange options market. There were 30 market makers on the spot market and 27

market makers on the forward and swap markets.

7. The gold market operated steadily with an overall rise in prices

Gold prices experienced a choppy rise. At end-2020, Loco London closed at

USD1,897.5 per ounce, representing a gain of 25.07 percent from end-2019. The

Au99.99 on the Shanghai Gold Exchange closed at RMB390.0 per gram, increasing

14.44 percent from end-2019. In 2020, the volume of gold traded on the Shanghai

Gold Exchange was 58,700 tons, representing a decrease of 14.44 percent year on

year. The turnover posted RMB22.55 trillion, increasing 4.91 percent year on year.

II. Development of institutional arrangements in the financial markets

1. Institutional arrangements in the bond and bill market

The legal system of the bond market was improved. In February 2020, the China

Securities Regulatory Commission (CSRC), Ministry of Finance (MOF), People’s

Bank of China (PBC), and China Banking and Insurance Regulatory Commission

(CBIRC) jointly released an announcement allowing qualified pilot commercial banks

and insurers with proper investment management capacity to participate in the trading

of treasury bond futures at the China Financial Futures Exchange in line with the

principles of law compliance, manageable risks, and sustainable business

development. In June 2020, the PBC, together with the relevant departments, released

the Notice of the PBC, NDRC, and CSRC on Issues Concerning Disposal of Defaults

on Corporate Debenture Bonds (Yinfa No.144 [2020]), which improved the risk

prevention and disposal mechanism of defaults on corporate debenture bonds. In the

meantime, the PBC promoted release of the Minutes of the Symposium on Courts’

Hearings of Bond-Related Dispute Cases by the Supreme People’s Court so as to

consolidate legal safeguards. In July 2020, the PBC and relevant departments jointly

released the Rules for Recognition of Standard Debt-Based Assets (Announcement

No.5 [2020] of the PBC, CBIRC, CSRC and SAFE), which specified the boundaries,

identification criteria, and regulatory arrangements for standard debt-based assets and

non-standard debt-based assets so as to guide well-regulated market development. In

December 2020, the PBC released Announcement No.21 [2020] of the PBC, for the

purpose of strengthening interim and ex-post management of market makers for spot

bond trading in the interbank market following the cancellation of administrative

approvals. In December 2020, the PBC, together with the relevant departments,

released the Administrative Measures for Information Disclosures of Corporate

Debenture Bonds (Announcement No.22 [2020] of the PBC, NDRC and CSRC),

which unified the standards for information disclosures of corporate debenture bonds.

In December 2020, the Standing Committee of the 13th National People’s Congress

deliberated and approved Amendment (XI) to the Criminal Law, which greatly

increased penalties for crimes such as fraudulent issuances, fabricated information

disclosures, false certificates provided by intermediaries, and so on, in an attempt to

provide a solid legal safeguard for the high-quality development of the bond market.

In June 2020, the PBC released the Administrative Measures on Standardized Bills

(Announcement No.6 [2020] of the PBC). Standardized bills connect the bill market

with the bond market and enable the professional pricing and investing capacity of the

bond market to be fully leveraged in a way that improves the standardization of bill

transactions and enhances the financing function of bills. In December, the PBC

released Announcement No.19 [2020] of the PBC, which specifies, in terms of

commercial acceptance drafts, the requirements for information indicated on the

drafts and the disclosure of credit information of acceptors so as to improve

market-based constraint mechanisms and safeguard the legitimate rights and interests

of holders.

2. Institutional arrangements in the capital market and the securities and

futures industry

Significant progress was secured in the capital market reform. On a national scale, the

CSRC removed foreign ownership limits in futures companies from January 1, 2020

and those in securities companies and fund management companies from April 1,

2020. In July 2020, the first group of enterprises went public on the newly established

National Equities Exchange and Quotations Select (NEEQ Select), achieving critical

headway in building a multi-layer capital market. In August 2020, the reform of

ChiNext market was officially launched with the pilot registration-based system in

place, which was an important achievement in the reform of the registration-based

IPO system.

The legal system in the capital market was further improved. The new Securities Law

was implemented as of March 1, 2020, which provided a solid legal guarantee for

preventing and controlling market risks, safeguarding the legitimate rights and

interests of investors, and forging a well-regulated, transparent, open, vigorous, and

resilient capital market. In July 2020, the Supreme People’s Court released the

Provisions on Several Issues Concerning Representative Actions Arising from

Securities Disputes, marking the official launch of China’s class action system in

securities disputes.

Capital market building was stepped up. In October 2020, the State Council released

the Opinions on Further Improving the Quality of Listed Companies, for the purposes

of improving the quality of listed companies in six respects, including advanced

corporate governance and strengthened corporate growth. In November 2020, the

Central Committee for Deepening Overall Reform deliberated and approved the

Implementation Plan for Improving the Delisting Mechanism of Listed Companies,

aiming to improve the delisting mechanism and enhance the delisting intensity for

listed companies through six means, including improving delisting standards and

streamlining delisting procedures.

3. Institutional arrangements in the insurance market

The development of commercial insurance in the social service sector was bolstered.

In January 2020, the CBIRC, together with 12 other ministries and commissions,

issued the Opinions on Promoting the Development of Commercial Insurance in the

Field of Social Services, which introduced 11 policies and measures in five respects to

help commercial insurance play a better role in the social service sector.

The property insurance industry was propelled to shift toward high-quality

development. In July 2020, the CBIRC released the Notice on Issuing the Three-Year

Action Plan (2020–2022) for Promoting High-Quality Development of the Property

Insurance Industry and put forward elaborate planning, including such aspects as the

transformation and development of the industry, the capability to serve the national

economy, society, and people’s livelihood, the level of opening-up and international

influence as well as regulatory policies, systems, and mechanisms.

The development of personal insurance was promoted, featuring wider coverage,

improved quality, and steady growth. In December 2020, measures were rolled out at

the executive meeting of the State Council to promote personal insurance

development featuring wider coverage, improved quality, and steady growth. The

measures include accelerating the development of commercial health insurance,

incorporating commercial pension insurance into old-age pension services as the third

pillar and speeding up its construction, and enhancing the long-term investment

capacity of insurance funds.

4. Enhancing coordinated supervision of the financial infrastructure

In March 2020, after being deliberated and passed at the tenth meeting of the Central

Committee for Deepening Overall Reform, the Work Plan on Coordinating

Supervision over the Financial Infrastructures (Yinfa No.54 [2020]) was co-issued by

the PBC, NDRC, MOF, CBIRC, CSRC, and State Administration of Foreign

Exchange (SAFE). The work plan aimed to further improve the coordinated

supervision and construction planning of the financial infrastructure in China and to

enhance the capability of serving the real economy and forestalling financial risks. In

July 2020, the PBC and CSRC jointly issued Announcement No. 7 [2020] of the PBC

and CSRC and approved interconnectivity cooperation between relevant infrastructure

institutions in the interbank bond market and the exchange-traded bond market. The

PBC and CSRC will strengthen regulatory cooperation and coordination to boost the

free flow of factors in the bond market.

5. Promoting the high-level opening-up of the financial market

In March 2020, under the guidance of the PBC, relevant financial infrastructures

improved their transaction settlement arrangements and launched services such as

rolling settlement and flexible settlement intervals, which met the diversified needs of

overseas institutional investors and further facilitated their operations. In September

2020, the PBC, CSRC and SAFE jointly drafted the Announcement on Issues

Concerning Investment in China’s Bond Market by Overseas Institutional Investors

(Exposure Draft), which clarifies the overall institutional arrangements for the

opening-up of China’s bond market and solicits market opinions on the arrangements

facilitating overseas institutional investors to allocate RMB bond assets. In September

2020, FTSE Russell announced that it would add China government bonds to its

World Government Bond Index (WGBI) in October 2021. So far, all of the three

global major bond index providers have included or are planning to include China’s

bonds in their relevant indexes, which fully reflects international investors’

confidence in the long-term sound development of China’s economy and further

opening-up of China’s financial sector.

Part 4. Macroeconomic Overview

I. Global economic and financial developments

In 2020, impacted by the COVID-19 pandemic, the global economy has experienced

the most severe recession since World War II. The advanced economies have

implemented ultra-loose monetary policies and large-scale fiscal stimulus plans, and

the economies recovered in the second half of the year. Meanwhile, the pandemic has

caused the rise of fiscal sustainability risks and financial risks that deeply influenced

the global economic structure, international trade and investment, and may lead to a

long-lasting scarring effect.

1. Economic and financial market performance in the major economies

The global economy has experienced a slow recovery. In 2020, the major advanced

economies went through a GDP drop in Q2, a GDP rise in Q3, and a recovery

divergence in Q4. In Japan, the year-on-year GDP growth rate in Q3 was -5.7 percent,

with the drop declining by 4.6 percent from Q2. The US posted a 2.5 percent

year-on-year GDP decrease in Q4, with the drop declining by 6.6 and 0.4 percentage

points from Q2 and Q3 respectively, while the annual year-on-year GDP decrease was

3.5 percent. The euro area posted a 5.1 percent year-on-year GDP decrease in Q4,

with the drop declining by 9.6 percentage points from Q2 but expanding slightly by

0.8 percentage points from Q3, while the annual year-on-year GDP decrease was 6.8

percent. The global pandemic has worsened since December 2020, with nearly 20

million new confirmed COVID-19 global cases in a single month and over 100

million cumulative confirmed COVID-19 global cases. Numerous countries enhanced

their pandemic control measures, and the economic recovery slowed down. The US

Consumer Confidence Index dropped from its peak of 49.8 in November to 44.6 in

December, while the services PMI in the euro area and the U.K. dropped below 50

since September and November, respectively. The International Monetary Fund (IMF),

World Bank, and Organization for Economic Co-operation and Development (OECD)

posted a decrease in their latest global growth forecasts for 2020 by 3.5, 4.3, and 4.2

percent, while bouncing back by 5.5, 4.0, and 4.2 percent for 2021, respectively, with

the global economy basically not recovering to its pre-pandemic level until Q4 of

2021.

The labor market has deteriorated. The US unemployment rate reached its peak of

14.8 percent in April 2020 and has gradually decreased ever since, while the drop

continued to decline, with the December unemployment rate remaining unchanged at

6.7 percent from November. From April to November 2020, the euro area

unemployment rate increased from 7.2 percent to 8.3 percent, while the U.K.

unemployment rate increased from 4.0 percent to 5.0 percent. The deterioration of

labor market conditions not only reflected the increase in the unemployment rate but

also the decline in working hours. The International Labor Organization estimated

that global working hours in Q3 2020 decreased by 12.1 percent from Q4 2019, which

equals a loss of 345 million full-time jobs.

Inflation generally went down, with a divergence across the economies. The major

advanced economies have continued with a low level of inflation. In December 2020,

the year-on-year growth rate of the CPI posted 1.4 and 0.6 percent for the US and

U.K., respectively, while the year-on-year growth rate of the HICP in the euro area

and the CPI for Japan posted -0.3 and -1.2 percent. Some of the emerging market

economies experienced a deflation. Thailand and Malaysia continued to have a

negative CPI growth rate since March 2020, with a year-on-year growth rate of -0.3

and -1.4 percent, respectively. Meanwhile, India, Brazil, and other economies have to

some extent faced some structural inflationary pressures, with a 4.6 percent

year-on-year growth rate of the CPI for India and a 4.5 year-on-year growth rate of

the IPCA for Brazil in December.

International trade and investment declined significantly. The WTO forecast that the

volume of world merchandise trade would record a 9.2 percent year-on-year decline

in 2020, followed by a potential 7.2 percent rebound in 2021, while the trade volume

might still be significantly lower than the level in 2019. The United Nations

Conference on Trade and Development (UNCTAD) stated that global foreign direct

investment experienced a 42 percent year-on-year decrease, and growth would

continue to be weak in 2021.

Table 13 Macroeconomic and Financial Indicators in the Major Advanced

Economies

Economy

Indicator

Q4 2019

Q1 2020

Q2 2020

Q3 2020

Q4 2020

Oct.

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

May

Jun.

Jul.

Aug.

Sept.

Oct.

Nov.

Dec.

United States

Real GDP Growth

(annualized quarterly

rate, %)

2.4

-5.0

-31.4

33.4

4.0

Unemployment Rate

(%)

3.6

3.5

4.4

14.8

13.3

11.1

10.2

8.4

7.8

6.9

6.7

CPI (year-on-year, %)

1.8

2.1

2.3

2.5

2.3

1.5

0.3

0.1

0.6

1.0

1.3

1.4

1.2

1.4

DJ Industrial Average

(end of the period)

27046

28051

28538

28256

25409

21917

24346

25383

25813

26428

28430

27782

26502

29639

30606

Euro Area

Real GDP Growth

(year-on-year, %)

1.0

-3.2

-14.7

-4.3

-5.1

Unemployment Rate

(%)

7.4

7.3

7.2

7.4

7.3

7.6

7.9

8.6

8.4

8.3

HICP

(year-on-year, %)

0.7

1.0

1.3

1.4

1.2

0.7

0.3

0.1

0.3

0.4

-0.2

-0.3

EURO STOXX 50

(end of the period)

3604

3704

3745

3641

3329

2787

2928

3050

3234

3274

3273

3294

2958

3493

3572

Sources: Statistical Bureaus and Central Banks of the Relevant Economies.

There were heightened potential risks in the financial markets. In March 2020,

financial markets in the major advanced economies fell into a panic, reflected by a

sell-off in risky assets and some traditional safe haven assets, and circuit-breakers in

the stock markets of multiple countries amid a liquidity contraction of the US dollar,

as well as currency depreciations and large capital outflows in the emerging

economies. Since April, as the major economies adopted large-scale stimulus plans,

market sentiment tended to calm down, and the financial markets were significantly

restored. The liquidity of the US dollar converted from a shortage to abundance, with

the USD index declining from 102 in March to 90 at the end of December. At the end

of 2020, the one-year London interbank market USD-Libor was 0.34 percent, 166 bps

lower than that at the end of last year, while the one-year euro-area interbank market

Euribor was -0.50 percent, 25 bps lower than that at the end of last year. Against the

background of a weak recovery of the real economy, global stock markets rebounded

strongly, with a new high for the three major US stock market indexes in December

2020, which was detached from economic fundamentals with heightened potential

risks.

2. Monetary policies of the major economies

Implementing ultra-loose monetary policies. First, policy rates were swiftly

lowered. In March 2020, over 40 central banks across the globe lowered their interest

rates more than 50 times in total, while the US Fed, the Bank of England (BOE), and

the Bank of Canada (BOC) set their policy rates close to zero. Second, the scale of

United Kingdom

Real GDP growth

(year-on year, %)

1.2

-2.4

-20.8

-8.6

…

Unemployment Rate

(%)

3.8

3.9

4.0

4.1

4.3

4.5

4.8

4.9

5.0

...

CPI (year-on-year, %)

1.5

1.3

1.8

1.7

1.5

0.8

0.5

0.6

1.0

0.2

0.5

0.7

0.3

0.6

FTSE 100 (end of the

period)

7248

7347

7542

7286

6581

5672

5901

6077

6170

5898

5964

5866

5577

6266

6461

Japan

Real GDP Growth

(annualized quarterly

rate, %)

-7.2

-2.1

-29.2

22.9

…

Unemployment Rate

(%)

2.4

2.2

2.4

2.5

2.6

2.9

2.8

2.9

3.0

3.1

2.9

CPI (year-on-year, %)

0.2

0.5

0.8

0.7

0.4

0.1

0.3

0.2

0.0

-0.4

-0.9

-1.2

NIKKEI 225 (end of

the period)

22927

23294

23657

23205

21143

18917

20194

21878

22288

21710

23140

23185

22977

26434

27444

monetary policy operations was expanded. The US Fed, the BOC, and the Bank of

Japan (BOJ) increased the scale and duration of their repurchase agreements. The

European Central Bank (ECB) increased the volume and decreased the price of its

targeted longer-term refinancing operations (TLTRO III). Third, asset purchase plans

were resumed or enhanced. The US Fed and the BOJ committed unlimited treasury

purchases, while the ECB expanded its asset purchase program (APP) and set up a

new pandemic emergency purchase program (PEPP). The central banks in Australia,

Canada, India, South Korea, and other countries also launched bond purchase plans.

Providing targeted support through liquidity facilities. The US Fed resumed and

upgraded the rescue facilities it had used during the 2008 Global Financial Crisis to

relieve the pressure on financial markets. It also established the paycheck protection

program liquidity facility (PPPLF) and multiple structural facilities to engage in

rescuing enterprises, individuals, and other market entities. The ECB introduced

long-term COVID-19 pandemic emergency refinancing operations.

Assessing and adjusting monetary policy frameworks. In 2020, the central banks

of some advanced economies in succession conducted assessments of their monetary

policy frameworks. In August, after completing its latest assessment, the US Fed

declared it would revise its monetary policy framework aiming to achieve an inflation

rate that averages 2 percent. It stated that its monetary policy response to real

employment would depend on the shortfalls, instead of the deviations, from the

maximum employment level, and it emphasized that employment judgments would be

based on multiple dimensions. The ECB and the BOC are expected to complete their

assessments of their monetary policy frameworks in 2021.

Box 3 The Spillover Effect of Monetary Policies in the Major Economies

Central banks in the major economies, including the US, the euro area, and Japan,

have rolled out large-scale monetary stimulus measures since March, 2020 to respond

to the shock of the COVID-19 pandemic that has affected economic development and

financial markets. The balance sheets of the US Fed, the European Central Bank, and

the Bank of Japan expanded by 77 percent, 50 percent, and 23 percent respectively

through 2020, and global liquidity remained extremely ample.

The spillover effect of overseas accommodative monetary policies warrants our

attention. In general, when major central banks adopt accommodative policies, the

liquidity within these countries will leak across borders. In previous crises, as the

turbulence in the international financial market easily triggered panic in the market,

and funds flew back to the major developed economies amid heightened risk aversion,

the impact of such leakage on policy effect was, to some extent, moderated. However,

global liquidity that flew back to the major developed countries dwindled during this

round of the COVID-19 response. For instance, foreign holdings of US treasuries

grew by 3.3 percent in 2008 when the global financial crisis broke out, while such

holdings decreased by 3.8 percent during the first 11 months of 2020. Comparatively,

the current situation in China is sound, as it is the first country to contain the

pandemic, to resume work and production, and to achieve positive economic growth.

Overseas fund inflows to China’s bond market exceeded RMB1 trillion in 2020,

among which long-term funds from overseas central banks accounted for over 60

percent, with government bonds and policy financial bonds as the main types of

purchases. Of course, in the long run, as the pandemic gradually comes under control

and the economic recovery becomes clear, the accommodative monetary policies in

the major economies may end, and the direction of capital flows may change as well.

For a super-large economy like China’s, this is normal, but we should also guard

against the risks.

As the second largest economy in the world, China made an average of 30 percent of

an actual contribution to global economic growth over the past decade; it is no longer

a passive receiver of the spillover effect of macro-policies from the advanced

economies and it has its own macro policies manifesting such an effect. Moreover,

China has been pursuing conventional monetary policies since 2020, and it is one of

the few major economies to do so. Conventional monetary policies have the following

three features: First, the interest rate remains within the normal range, not falling to

zero or into negative territory; Second, the central bank’s balance sheet is basically

stable, and the banks’ market-based function of money creation is brought into play

normally and effectively; Third, the macro-leverage ratio and the growth pace of

money and credit are far below the level during the global financial crisis responses in

2009. On balance, China fairly manages a long-tern equilibrium of stabilizing growth

and preventing risks by pursuing a conventional monetary policy. In 2020, with the

economy growing at 2.3 percent, China is the only major economy that has achieved

positive growth, which is conducive to boosting a global economic recovery and to

promote the normalization of monetary policies in other major economies.

It was noted at the Fifth Plenary Session of the 19th CPC Central Committee that we

will establish a modern central banking system and will strengthen coordination of

international macroeconomic policies. Improvements in the mechanism for the

coordination, cooperation, and governance of international finance not only reflect

strengthened coordination of international macroeconomic policies but they also

constitute an important part of the development of a modern central banking system.

In the next stage, in accordance with the guiding principles of

the Fifth Plenary Session of the 19th CPC Central Committee and the Central

Economic Work Conference and from the perspective of improving the mechanism

for the coordination, cooperation, and governance of international finance, we will

strengthen the coordination of international monetary policies, advance the reform of

the international monetary system and financial supervision, actively participate in the

construction of a global financial safety net, improve the RMB exchange rate

formation mechanism, and promote two-way opening up in the financial sector.

3. Issues and trends that merit attention

First, the COVID-19 pandemic will remain the largest source of uncertainty for

the global economy in 2021. Recently, the number of new global cases has remained

high, and virus mutations have appeared in multiple locations, while the effectiveness

and side-effects of the vaccines, and people’s willingness to get vaccinated, remain

uncertain. These factors may continuously influence the economic recovery process.

In addition, a long-lasting pandemic might lead to adjustments in industrial chains,

supply chains, and the landscape of international trade and investment, which could

deeply influence global labor productivity, the inflation rate, and other factors.

Second, the sustainability of macroeconomic policies in the advanced economies

faces challenges. The IMF estimated that in 2020 the fiscal deficit to GDP ratio in the

advanced economies and the emerging market economies reached 13.3 and 10.3

percent, respectively, while the ratio of overall global public debt to GDP approached

nearly 100 percent, which illustrates the challenge to maintain the strength of the

fiscal stimulus. The major advanced economies have adopted accommodative

monetary policies for a long time, with decreasing marginal policy utility, which in

turn will worsen the problem of asset price bubbles, wealth inequalities, and debt

burdens.

Third, the risks in financial markets continue to accumulate. The overlap of

pressures in the real economy and vulnerabilities in financial markets has led to an

increase in the non-performing loans ratio for the banks in the advanced economies.

Due to a lack of prudential supervision, the leveraging behavior of non-banking

financial institutions may become an important source of potential risks. As the

valuations in capital markets become detached from the economic fundamentals, the

risks of market volatility rise.

Fourth, there are risks from trade protectionism and geopolitics. In recent years,

de-globalization has emerged with rising protectionism and unilateralism, while the

pandemic and the economic recession it has caused have further strengthened

introspective tendencies in some countries. Amid an increasingly complex

international environment, instabilities and uncertainties have increases notably.

II. Macroeconomic developments in China

In 2020, facing the complex and serious situations at home and abroad, especially the

shocks from the COVID-19 pandemic, departments in all regions adhered to the

general guideline of making progress while maintaining stability in their work, and

they made major strategic achievements to coordinate pandemic containment and

economic and social development. With the steady recovery of the national economy,

continuous development of industrial production, steady pickup of consumption and

investment, robust momentum of exports, and stable employment on the whole, China

is expected to be the only major economy in the world with positive economic growth.

According to preliminary statistics, GDP in 2020 grew by 2.3 percent year on year to

RMB101.6 trillion. By quarters, GDP in Q1 dropped by 6.8 percent year on year,

while that in Q2, Q3, and Q4 grew by 3.2 percent, 4.9 percent, and 6.5 percent year on

year respectively.

1. Consumption continuously improved, investments steadily rebounded, and

foreign trade registered positive growth

Residents’ income continuously rebounded, and consumption recovered steadily. In

2020, per capita disposable income registered RMB32189, up 4.7 percent year on

year in nominal terms. It increased by 2.1 percent in real terms, slightly lower than

economic growth. Residents’ income from wages and salaries recovered steadily, and

the income growth of rural residents outpaced that of urban residents. In 2020, total

retail sales of consumer goods dropped by 3.9 percent year on year to RMB39.2

trillion, among which those in Q4 grew by 4.6 percent year on year and registered an

acceleration of 3.7 percentage points from Q3. Sales of upgraded consumer goods and

online retail sales continued their rapid growth.

Fixed-asset investments rebounded steadily, and investments in the high-tech industry

grew rapidly. In 2020, total fixed-asset investments increased by 2.9 percent year on

year to RMB51.9 trillion. In terms of sectors, the year-on-year growth of investments

in infrastructure, the manufacturing sector, and real estate development registered 0.9

percent, -2.2 percent, and 7.0 percent, respectively. Investments in the high-tech

industry grew by 10.6 percent, 7.7 percentage points higher than the growth of total

investments. Specifically, investments in the high-tech manufacturing sector and the

high-tech service sector grew by 11.5 percent and 9.1 percent year on year,

respectively. Investments in social areas increased by 11.9 percent, among which

investments in health care and education grew by 29.9 percent and 12.3 percent,

respectively.

The momentum of exports was robust, and the trade structure continued to improve.

In 2020, imports and exports of goods grew by 1.9 percent year on year to RMB32.2

trillion. Specifically, exports grew by 4.0 percent year on year, with growth in

November and December accelerating to 14.9 percent and 10.9 percent respectively,

while imports decreased by 0.7 percent year on year. As a result, the trade surplus in

goods posted RMB3.7 trillion. The trade structure improved continuously. In 2020,

the share of imports and exports under general trade reached 59.9 percent, up 0.9

percentage points from 2019. Imports and exports of private enterprises grew by 11.1

percent year on year, accounting for 46.6 percent of total foreign trade, up 3.9

percentage points from 2019. Exports of machinery and electronics increased by 6

percent year on year, accounting for 59.4 percent of total exports, up 1.1 percentage

points from 2019. In 2020, China’s top five trade partners were ASEAN, the EU, the

US, Japan, and the ROK, and their trade with China grew by 7 percent, 5.3 percent,

8.8 percent, 1.2 percent, and 0.7 percent year on year respectively. China’s trade with

countries along the Belt and Road grew by 1 percent to reach RMB9.37 trillion.

Utilized foreign direct investment (FDI) hit a record high, with a further improved

structure. In 2020, actually utilized FDI increased by 6.2 percent year on year to

RMB999.98 billion. Specifically, actually utilized FDI in the service industry grew by

13.9 percent to RMB776.77 billion, accounting for 77.7 percent of total FDI. FDI in

the high-tech industry grew by 11.4 percent, among which that of the high-tech

service industry grew by 28.5 percent.

In 2020, outward investment cooperation remained stable. Outward direct investments

(ODI) grew by 3.3 percent to USD132.94 billion, among which non-financial ODI

edged down by 0.4 percent year on year to USD110.15 billion. In 2020, investment

cooperation with countries along the Belt and Road made steady progress.

Non-financial ODI in 58 countries along the Belt and Road grew by 18.3 percent year

on year to USD17.79 billion, accounting for 16.2 percent of total ODI over the same

period, up 2.6 percentage points from 2019. In particular, ODI in the

leasing/commercial services industry and the wholesale/retail industry witnessed

year-on-year growth of 17.5 percent and 27.8 percent, respectively.

Box 4 Rational Evaluation of Risks Concerning Household Debt

The rising household leverage in China has recently attracted wide attention. The

increase is mainly due to growing home loans, consumer loans, and credit card

overdrafts, but part of it also represents the operating loans of self-employed

businesses, which thereby require objective differentiation and a rational evaluation.

At the same time, we need to be highly vigilant of debt sustainability and the potential

risks caused by surging household leverage, and refrain from over-relying on

consumer finance to boost consumption.

The main difference between consumer debt and operating debt lies in a capability to

generate revenue for repayment. Although household debt, which is largely

consumption-oriented, may be an expedient way of financing, it tends to erode

households’ future consumption capacity and therefore may become unsustainable, as

consumption activities cannot generate revenue that covers debt obligations and

repayment relies primarily on payroll earnings. By contrast, corporate debt is mostly

business-related and it finances the purchase of labor, equipment, and raw materials

for production and sales, which not only generates revenue for debt repayments but

also bolsters consumption through job creation. According to some research,

multi-national evidence shows that household debt hangover is worse than that of

corporate debt. It should be noted, however, that if household debt finances business

activities, then it resembles corporate debt, which makes it the key difference between

China’s household leverage and that in other major economies. Therefore, when

observing and comparing China’s household leverage, we should exclude the part that

finances business activities.

Around 20 percent of the household debt in China is business-related, the exclusion of

which would put household leverage within a reasonable range compared with other

economies. The operating debt in China’s household sector mainly consists of

operating loans issued to self-employed businesses. It also includes consumer loans

and credit card financing used by these businesses for operational purposes.

According to BIS, as of end-H1 2020, the leverage ratio of the household sector in

China was 59.1 percent, close to that in the eurozone and Japan. However, after

removing the operating debt from the total household debt, the ratio drops to roughly

46 percent, which is still within a reasonable range in a global context (see figure

below).

Figure 6 Household Leverage in a Global Context

Source: PBC, BIS.

The risks of China’s household debt are generally manageable, although there is

limited macro policy space. Against the background of “houses are for living in, not

for speculation” and enhanced regulation of consumer finance, the growth of

household debt has decelerated from 20 percent in previous years to the current 15

percent, and household leverage has also shown a deceleration. Given the large

contribution of operating debt to household leverage, the traditionally high savings

rate, the high down payment requirement, and the diversified household debt, the

risks related to China’s household debt are still manageable. However, we should be

vigilant of the rising leverage of the household sector since 2011. From end-2011 to

H1 2020, the leverage increased more than 31 percentage points, leaving very little

space for further expansion of household debt and therefore deserves close attention.

We need to be highly vigilant of debt sustainability and potential risks due to surging

household leverage. First, in terms of consumer finance, some consumer-debtors are

irrational in that their prospective income does not match their repayment

expenditures and they borrow and spend beyond their future repayment capability,

thereby posing potential financial risks. In addition, should businesses expand their

production in response to these credit-driven consumption demands, the problem of

overcapacity will arise when household debt builds up and the consumer-debtors can

no longer repay their debt. This is inconsistent with the need for high-quality

development. Meanwhile, some financial institutions have overlooked the risks

underlying consumer finance during the rapid expansion of consumer loans. This has

led to a significant deterioration of client quality as well as to the prominent problems

concerning multiple platforms lending to the same client and over-extending credit to

related parties of a client. Since the beginning of 2020, there have been signs of

higher non-performing ratios for credit card financing and consumer loans in certain

banks.

In general, facilitating the building of a new development paradigm entails emphasis

on management of the demand side and adherence to a strategic focus of boosting

domestic demand so as to stimulate consumption. However, it is inappropriate to

expand consumption through an over-reliance on consumer finance. Financial

innovations should proceed under prudential regulation, and more efforts should be

put into promoting employment and improving social security, the income structure,

and the consumption environment. Work should be done to combine the dual tasks of

boosting domestic demand and deepening the supply-side structural reform, thereby

enhancing the fundamental role of consumption in promoting high-quality economic

development.

2. Agricultural production improved, industrial production continued to grow,

and the service industry recovered gradually

In 2020, the primary, secondary, and tertiary industries grew by 3.0 percent, 2.6

percent, and 2.1 percent year on year, respectively, accounting for 7.7 percent, 37.8

percent, and 54.5 percent of GDP. The share of tertiary industry in total industry

surpassed that of secondary industry by 16.7 percentage points, up 1.0 percentage

point from 2019.

China witnessed another bumper harvest of grain production and a rapid recovery of

hog production. In 2020, the value-added of agriculture grew by 3.0 percent year on

year, decelerating by 0.1 percentage points from 2019. Grain output recorded a new

high and the annual output has been over 650 million tons for six years in a row. Hogs

in stock continued a fast recovery and the decline in hogs available for slaughter

narrowed significantly. At end-2020, hogs in stock increased by 31.0 percent year on

year and saw quarter-on-quarter growth for five consecutive quarters. In 2020, hogs

available for slaughter declined by 3.2 percent year on year. Specifically, the

year-on-year growth of hogs available for slaughter turned positive in Q3 and growth

in Q4 accelerated to 22.9 percent.

Industrial production recovered gradually quarter on quarter, with the economic

efficiency of enterprises continuously improved. In 2020, the value-added of

Industrial Enterprises above a Designated Size (IEDS) increased by 2.8 percent year

on year, specifically, that in Q4 increased by 7.1 percent. In 2020, the high-tech

manufacturing sector and the equipment manufacturing sector saw rapid growth,

namely, 7.1 percent and 6.6 percent respectively year on year. This was 4.3 percentage

points and 3.8 percentage points higher than that of the IEDS, which played an

important role in supporting economic development. In 2020, total profits of the IEDS

increased by 4.1 percent year on year and maintained double-digit growth for seven

consecutive months, particularly with year-on-year growth in December accelerating

to 20.11 percent. According to the Entrepreneur Survey Report conducted in Q4 by

the PBC, the Business Climate Index posted 55.8 percent, up 6.4 percentage points

from Q3 and 0.2 percentage points from the same period of 2019. The Profitability

Index registered 59.8 percent, up 2.5 percentage points from the same period of 2019.

The service industry recovered steadily and the modern service industry showed

sound growth momentum. In 2020, the Index of Service Production (ISP) was on par

with that in 2019. Specifically, the ISP in Q4 increased by 7.7 percent year on year,

accelerating by 3.4 percentage points from Q3. In 2020, the value-added of the service

industry grew by 2.1 percent year on year, accounting for 54.5 percent of GDP,

accelerating by 0.2 percentage points from 2019. In particular, the value-added of the

service industry in Q4 grew by 6.7 percent year on year, which was on par with that in

Q4 2019. The vitality of the modern service industry was continuously released. The

value-added of the information communications/software/IT services sector, the

financial sector, and the real estate sector increased by 16.9 percent, 7.0 percent, and

2.9 percent respectively year on year, which contributed to the acceleration in the total

service industry by 2.7 percentage points. In December 2020, the Expected Business

Activities Index for the service industry reached 60.1 percent, remaining in the

expansion area for six consecutive months and demonstrating the strong confidence of

enterprises in the development of the market. It should also be noted that due to the

pandemic, although some service sectors such as the catering sector resumed, their

growth was still relatively slower than that of other sectors. In 2020, revenue of the

catering sector decreased by 16.6 percent year on year, decelerating by 7.3 percentage

points from Q1–Q3 of 2020.

3. The growth of consumer prices decelerated and the decline in producer prices

narrowed

The growth of consumer prices decelerated. Due to factors such as the pandemic, the

gradual recovery of the capacity for hog production, and the high base figure in H2

2019, the CPI had been on a rising trend for some time before falling thereafter,

registering a year-on-year growth of 2.5 percent in 2020. Specifically, the growth of

food prices grew by 10.6 percent year on year, accelerating by 1.4 percentage points

from 2019. The growth of non-food prices grew by 0.4 percent year on year,

decelerating by 1.0 percentage point from 2019. The core CPI (food and energy

excluded) rose moderately by 0.8 percent year on year, decelerating by 0.8 percentage

points from 2019.

The decline in producer prices decelerated. In 2020, the Producer Price Index (PPI)

mainly moved in the negative territory. However, as industrial production steadily

recovered, market demand continuously picked up, and the industrial product prices

gradually rose, the PPI in 2020 saw a U-shaped trend and then dropped by 1.8 percent

year on year, an acceleration of 1.5 percentage points compared with 2019. The

Purchasing Price Index for Industrial Products (PPIRM) dropped by 2.3 percent year

on year, accelerating by 1.6 percentage points from 2019. In 2020, the Corporate

Goods Price Index (CGPI), monitored by the PBC, decreased by 1.2 percent year on

year, decelerating by 0.2 percentage points compared with Q1–Q3 of 2020.

4. The decline in fiscal revenue decelerated, and employment generally

improved

The decline in fiscal revenue decelerated. In 2020, revenue in the national general

public budget posted RMB18.3 trillion and decreased by 3.9 percent year on year,

decelerating by 6.9 percentage points compared with H1 2020. Specifically, tax

revenue amounted to RMB15.4 trillion, down 2.3 percent year on year. Non-tax

revenue reached RMB2.9 trillion, down 11.7 percent year on year. The domestic

value-added tax, domestic consumption tax, and business income tax dropped by 8.9

percent, 4.3 percent, and 2.4 percent year on year, respectively, while the personal

income tax increased by 11.4 percent year on year.

Fiscal expenditures rebounded gradually. In 2020, expenditures in the national general

budget saw an increase of 2.8 percent year on year to RMB24.6 trillion, accelerating

by 8.6 percentage points compared with H1 2020. In terms of the expenditure

structure, expenditures related to health care and social security/employment grew

quickly, registering year-on-year growth of 15.2 percent and 10.9 percent,

respectively.

In 2020, budgetary revenue from nationwide government-managed funds totaled

RMB9.3 trillion, up 10.6 percent year on year. Specifically, revenue from land sales

rose by 15.9 percent year on year. Budgetary expenditures from nationwide

government-managed funds increased by 28.8 percent year on year to RMB11.8

trillion.

Employment was generally stable. At the beginning of 2020, the outbreak of the

pandemic resulted in restrictions on economic activities and shutdowns of enterprises,

with the job market severely affected. As the pandemic containment achieved positive

results, enterprises resumed production and the job market gradually recovered, with

employment continuously improving. In 2020, 11.86 million people were newly

employed, which was noticeably higher than the expectation of above 9 million, and it

fulfilled 131.8 percent of the annual target. In 2020, the surveyed unemployment rate

in urban areas was 5.6 percent, lower than the set target of 6 percent. Employment

pressures from rural migrants were eased and the employment of graduates was

generally stable. The number of rural migrants in 2020 decreased by 1.8 percent year

on year to 285.6 million, down 5.17 million from 2019. The average annual revenue

of rural migrants increased by 2.8 percent year on year to RMB4,072. In December,

the unemployment rate of employees aged between 20 and 24 with college diplomas

or above was on par with that in the same period of 2019.

5. The balance of payments and external debt

A basic equilibrium was maintained in the balance of payments. China’s current

account surplus stood at USD168.7 billion in Q1–Q3 2020. To be specific, the surplus

in trade in goods was USD340.2 billion, whereas the deficit in trade in services was

USD116.8 billion. The capital and financial account deficit stood at USD73.8 billion.

At end-December, foreign exchange reserves increased by 3.5 percent year on year to

USD3.2165 trillion, up USD108.6 billion from end-2019. By end-September 2020,

the balance of full-caliber foreign debt (denominated in both domestic and foreign

currencies) posted USD2.2944 trillion. In particular, the short-term external debt

balance was USD1.2956 trillion, accounting for 56 percent of the total external debt

balance.

6. Analysis by sector

6.1 The real estate sector

In 2020, housing prices remained generally stable in China. Due to the pandemic,

housing sales and investments in real estate development witnessed a decrease at the

beginning of 2020 but have recovered continuously since March. At end-2020, among

the 70 medium and large-sized cities nationwide, newly built housing prices and

second-hand residential housing prices increased by 3.7 percent and 2.1 percent year

on year respectively, decelerating 3.1 percentage points and 1.5 percentage points

from end-2019. In 2020, the total floor area of sold units increased by 2.6 percent year

on year, and housing sales increased by 8.7 percent year on year. In 2020, investments

in real estate development grew by 7 percent year on year, decelerating by 2.9

percentage points from 2019. Specifically, investments in residential housing

development rose by 7.6 percent year on year, registering a deceleration of 6.3

percentage points from 2019 and accounting for 73.8 percent of total investments in

real estate development.

Table 14 Floor Area of Real Estate Projects that were Newly Started, Under

Construction, and Completed in 2020

Floor area

(100 million square

meters)

YOY growth

(%)

Acceleration of

YOY growth

from 2019

(percentage

points)

Floor area of newly started

real estate projects

22.4

-1.2

-9.7

Floor area of real estate

projects under construction

92.7

3.7

-5.0

Floor area of completed

real estate projects

9.1

-4.9

-7.5

Source: National Bureau of Statistics of China.

The growth of real estate loans decelerated. At end-2020, outstanding real estate loans

by major financial institutions (including foreign-funded financial institutions) grew

by 11.6 percent year on year to RMB49.6 trillion, a deceleration of 3.2 percentage

points from end-2019. Outstanding real estate loans accounted for 28.7 percent of the

total lending balance. Specifically, outstanding individual housing loans grew by 14.5

percent year on year to RMB34.5 trillion, a deceleration of 2.2 percentage points from

end-2019. Outstanding housing development loans grew by 8.2 percent year on year

to RMB9.1 trillion, a deceleration of 6.4 percentage points from end-2019.

6.2 The high-tech manufacturing sector

The high-tech manufacturing sector mainly refers to the manufacturing industry with

intensive Research and Development (R&D) investments. As a high added-value

subset of the manufacturing industry, it represents the trend of high-quality

development, covering the manufacturing of pharmaceuticals, aerospace and

equipment, electronics and communication equipment, computers and office

equipment, medical equipment and instruments, and electronic chemicals. In recent

years, under the active guidance of the national innovation-driven strategy, China’s

high-tech manufacturing sector has witnessed improvements in quality and effect,

accelerated progress, and continuous expansion of scale.

In 2020, the pandemic dealt a blow to the high-tech manufacturing industry. However,

as major strategic achievements were made in the coordination of pandemic

containment with economic and social development, recovery of the high-tech

manufacturing sector accelerated, which served as an important prop for economic

growth. First, the scale of the sector expanded continuously. Year-on-year growth of

the value-added of the high-tech manufacturing sector turned positive in March 2020

and stood at 7.1 percent in 2020, 4.3 percentage points higher than that of Industrial

Enterprises above a Designated Size (IEDS). Specifically, the value-added of medical

equipment and instruments, of electronics and communication equipment, and of

computers and office equipment grew by 12.1 percent, 8.8 percent, and 6.5 percent

year on year, respectively, allowing this sector to play a greater role in driving the

economy. Second, the economic benefits of the sector recovered steadily. In 2020, the

profits of the high-tech manufacturing sector grew by 16.4 percent year on year, an

acceleration of 3.5 percentage points from the first three quarters of 2020. Third,

investment growth of the sector rebounded stably. In 2020, investments in the

high-tech manufacturing sector grew by 11.5 percent, among which those in the

pharmaceuticals manufacturing and computers and office equipment manufacturing

sectors grew by 28.4 percent and 22.4 percent, respectively.

Despite great achievements in the high-tech manufacturing sector, there are still

various challenges. First, as the investments in fundamental R&D and key and core

technologies are relatively insufficient, China’s industrial structure is at the low and

middle ends of the global value chain, and its capability for independent innovation is

in urgent need of improvement. Second, the share of the value-added of the high-tech

manufacturing sector in GDP remains fairly low, which lags far behind that in the

developed economies. Therefore, the role of the sector in driving the economy needs

to be enhanced. Third, due to the pandemic, the global supply chain has become

regional and localized. In addition, as global economic and trade frictions escalate,

China’s high-tech companies are faced with suppression and sanctions from some

countries, which pose a serious challenge to the upgrading of the high-tech

manufacturing sector.

Going forward, China will accelerate development of the high-tech manufacturing

sector as required for high-quality development. On the one hand, China will adhere

to the structural reform of the supply side, expand investments in the high-tech

manufacturing sector, promote the high-tech manufacturing sector to move up the

value chain, and guide and create new demand through innovation and high-quality

supply. It is necessary to invest more in R&D, make more breakthroughs in key

technologies, continue to focus on enhancing quality and effect, and strengthen the

guidance of innovation. China will provide professional and medium-to-long-term

funding support for sci-tech enterprises through innovating financial service models.

On the other hand, China will attach importance to the combination of developing

advanced manufacturing clusters and promoting the opening-up. It will continue to

attract foreign investment into advanced manufacturing clusters, promote integration

of the manufacturing industry into the international industrial chain, and guide and

adapt to the great changes brought about by the restructuring of the global industrial

chain.

Figure 7 Year-on-Year Growth of the Value-added of the High-tech

Manufacturing Industry

Source: National Bureau of Statistics of China.

Part 5. Monetary Policy Outlook

I. Outlook for the Chinese economy

The year 2020 is a very unusual and extraordinary year. Facing severe and

complicated international situations and the arduous tasks regarding domestic

reform and stability, and especially the serious impact of COVID-19, the entire

nation made concerted efforts under the strong leadership of the CPC Central

Committee with Comrade Xi Jinping at its core, and was among the first

countries to contain the pandemic, to resume work and production, and to

return to a positive economic growth. China achieved significant strategic results

in coordinating pandemic containment and economic and social development.

The 13th Five-year Plan wrapped up smoothly, and China is on course to finish

building a moderately prosperous society in all respects. The Chinese economy is

steadily recovering. The economic growth recorded 6.5 percent year on year for

Q4 2020 and 2.3 percent for the whole year, and the GDP in 2020 exceeded

RMB100 trillion. China is the only major economy to record a positive economic

growth and one of the few major economies that maintain a normal monetary

policy. Looking beyond the near term, the fundamentals of steady economic

growth in the long run and high-quality development remain unchanged.

The Chinese economy is returning to normal with stronger endogenous growth

drivers, and the economic fundamentals have improved in general. The recent

period has seen significantly rising industrial production and sustained export

momentum. Investments in the manufacturing sector are recovering and consumption

is in an overall recovery as well. Employment and people’s well-being are secured,

market expectations are generally stable, and there are more positive factors in

economic development. The financial sector has significantly improved the quality

and efficiency of its support for the real economy and has continuously enhanced its

support for micro, small and medium-sized enterprises (MSMEs) and private

businesses, providing the real sector with significantly more perceivable benefits.

Having achieved major progress in the critical battle against financial risks, the

financial system is generally sound and capable of defusing various risks. The RMB

exchange rate has been basically stable at an adaptive and equilibrium level and the

foreign exchange reserves remain above USD3 trillion. The economy has become

more resistant to external shocks.

Given that global economic and financial conditions are still complicated and

severe, and there are many uncertainties regarding the pandemic and the

external environment, the grounds for domestic economic recovery are not yet

solid. Since the beginning of Q4 2020, multiple regions around the world have

discovered coronavirus variants. COVID-19 cases resurged in major developed

economies while the vaccination progress was slower than expected. The rising debt

of the public and real sectors poses greater potential risks to financial markets, with

the global liquidity being extremely excessive. There is still considerable pressure

from imported infections and risks associated with the global economy and financial

markets. This winter brought concentrated COVID-19 outbreaks to many places in

China, which may cause uncertainties for a further recovery of consumption. The

macro leverage ratio temporarily rose because of pandemic responses, and the credit

risk of nonperforming loans may appear later, so there are still potential risks

concerning regional finance in China. In addition, we must not overlook medium and

long-term challenges, such as the accelerating aging of the population, insufficient

technological innovation capacity, and increasing constraints on resources and the

environment. Therefore, it is necessary to enhance awareness of opportunities and

risks. The PBC will focus on taking care of its own matters by properly handling the

relationship between reforms and macro-management, short-term and long-term

considerations, as well as internal and external equilibria, so as to contribute to

high-quality development.

Consumer price growth is generally within a reasonable range, and there are no

grounds for persistent inflation or deflation. The CPI in 2020 dropped continuously

on a seasonal basis. The CPI growth recorded 2.5 percent in 2020, which is basically

within a reasonable range. In Q4 2020, the CPI growth dropped to near zero and

occasionally into the negative territory, which was mainly the result of the rebounding

of pandemic cases, the fluctuations in pork prices, and the high-base effect. Although

the CPI will be further subject to holiday disruptions at the beginning of 2021, these

factors are all momentary, and the CPI will likely rise again to a stable level as the

base effect and supply disruptions subside. Meanwhile, due to stronger endogenous

growth drivers and the continuous recovery of industrial production, the prices of the

means of production have grown more rapidly since the beginning of Q4 2020. The

PPI’s negative year-on-year growth narrowed further and is likely to turn positive in

the short term. Despite this, short-term price movements deserve close attention given

the uncertainties concerning the future path of the pandemic and the impact of

containment measures on supply and demand. In the medium and long term, the

Chinese economy is expected to witness a stable growth. Given that the aggregate

supply and demand are basically in equilibrium, monetary policies remain sound, and

monetary conditions are reasonable and appropriate, there are no grounds for

persistent inflation or deflation.

II. Outlook for monetary policy in the next stage

In the next stage, the PBC will continue to follow the guidance of Xi Jinping Thought

on Socialism with Chinese Characteristics for a New Era and will fully implement the

guidelines of the Fifth Plenary Session of the 19th CPC Central Committee and the

Central Economic Work Conference. It will firmly implement the decisions and

arrangements of the CPC Central Committee and the State Council by adhering to the

general principle of pursuing progress while ensuring stability and by following the

requirements of the new development stage, applying the new development

philosophy, and fostering a new development paradigm. Giving top priority to

ensuring stability, the PBC will focus on what is important, defend the bottom line,

and live up to its responsibilities in an effort to consolidate and further the success

achieved in pandemic control as well as in economic and social development, while

maintaining policy continuity, stability, and sustainability. Work will also be done to

improve macroeconomic governance, to build a modern central banking system, to

conduct a cross-cyclical policy design, to achieve a balance of economic aggregates,

and to promote structural optimization as well as both internal and external equilibria.

Moreover, the PBC will continue to do its part well in ensuring stability on six fronts,

namely, employment, the financial sector, foreign trade, foreign investment, domestic

investment and expectations, and in maintaining security in six areas, namely,

employment, people's basic livelihood, operations of market entities, food and energy

security, stable industrial and supply chains and the normal functioning of

primary-level governments, thereby contributing to a good start for the establishment

of a new development paradigm and bringing on a new look.

The sound monetary policy will be flexible, targeted, reasonable, and appropriate,

giving top priority to ensuring stability and refraining from taking sharp turns. At the

same time, the PBC will manage the timing, intensity, and effectiveness of policy,

properly handle the relationship between economic recovery and risk prevention, and

keep sustainable room for the conduct of a normal monetary policy. To pursue the

objective of “maintaining the stability of the currency value and thereby promoting

economic growth”, the PBC will improve the mechanism of money supply

management, using a mix of monetary policy tools to keep liquidity adequate at a

reasonable level so that the growth rates of money supply and aggregate financing to

the real economy (AFRE) will be basically in line with nominal economic growth and

the macro leverage ratio will be kept basically stable. In the process, flexible

adjustments will be made to the intensity, pace, and focus of policy to accommodate

changes in the circumstances. The role of structural monetary policy tools in targeted

liquidity provision will be effectively brought into play, while steps will be taken to

build the systems and mechanisms needed to provide effective financial support for

the economy. The PBC will enhance the market-oriented interest rate formation and

transmission mechanism by improving the central bank policy rate system and

deepening the loan prime rate (LPR) reform. It will also consolidate the achievements

made in lowering real lending rates and will stabilize and reduce overall financing

costs for enterprises. While giving play to the decisive role of market supply and

demand in the formation of exchange rates and enhancing the flexibility of the RMB

exchange rate, the PBC will strengthen macro-prudential management to stabilize

market expectations and will guide enterprises and financial institutions to be risk-

neutral so that the RMB exchange rate will be kept basically stable at an adaptive and

equilibrium level. More efforts will be put into monitoring and analysis as well as

expectation management in order to keep prices basically stable. To firmly defend the

bottom line that no systemic risk should occur, the PBC will improve the systems of

financial risk prevention, early warning, resolution, and accountability and will

resolve prudently the risks associated with individual institutions and the risks arising

in key fields, while further steps will be taken to hold all relevant parties accountable

and to broaden channels for the replenishment of bank capital. Moreover, work will

be done to guide and create new demand with innovations and high-quality supply

and to accelerate the establishment of a new development paradigm with domestic

circulation as the mainstay and domestic and international circulations reinforcing

each other.

First, the PBC will pursue a sound monetary policy that is flexible, targeted,

reasonable, and appropriate. It will employ a mix of monetary policy tools, such as

the Medium-term Lending Facility (MLF), open market operations (OMOs), central

bank lending, and central bank discounts, to meet the reasonable demand of financial

institutions for short-, medium- and long-term liquidity. Through targeted and

effective operations, it will keep liquidity adequate at a reasonable level without

adopting indiscriminate stimulus measures. The PBC will improve the long-term

mechanism of liquidity, capital and interest rate constraints used for central bank

adjustments of bank money creation so as to properly control the general valve of

money supply and to keep economic growth close to its potential output growth. Work

will be done to guide market rates to move around OMO rates and MLF rates.

Moreover, the PBC will improve the mechanism for sustainable replenishment of

bank capital to support bank issuances of perpetual bonds, such as convertible

perpetual bonds, and to step up support for capital replenishment by small and

medium-sized banks via issuance of perpetual bonds, so that banks will be better able

to serve the real economy and to forestall and defuse financial risks. Measures will be

taken to improve macroeconomic governance, to optimize monetary policy objectives

as well as fiscal, employment, industry, investment, consumption, environmental

protection, regional and other policy objectives, and to promote a reasonable division

of duties and an efficient synergy.

Second, the PBC will make effective use of central bank lending, central bank

discounts, and the monetary policy tools providing direct support for the real

economy to bring into play their roles in targeted liquidity provision. On the one

hand, the countermeasures introduced in extraordinary times will be adjusted

prudently and follow-up arrangements will be made, while the two monetary policy

tools providing direct support for the real economy, i.e., the policy of deferring

principal and interest repayments for micro and small businesses (MSBs) and the

support scheme for unsecured inclusive MSB loans, will remain in place. On the other

hand, the PBC will innovate and improve the system of structural monetary policy

tools, design the incentive compatibility mechanism in a targeted way, and guide

financial institutions to ramp up support for those fields in conformity with the new

development philosophy. It will continue to use inclusive central bank lending and

central bank discount policies to increase financial support for sci-tech innovations,

MSBs, and green development. In an effort to implement the important decisions on

peaking carbon emissions and achieving carbon neutrality, the PBC will attach

importance to policy designs and planning and will establish policy incentives and

constraints to channel financial resources to the fields of green development.

Third, the PBC will build the systems and mechanisms needed to provide

effective financial support for the real economy. Measures will be taken to improve

the system for providing financial support for innovation and to develop fund chains

for innovation chains and industrial chains, thereby giving rise to a virtuous cycle and

triangular interactions among the financial sector, the sci-tech sector, and industries to

promote the industrialization and large-scale application of new technologies. The

PBC will push ahead with the regulated development and innovation of supply chain

finance by implementing supporting policies step by step in collaboration with the

relevant agencies and providing targeted services to support the completeness and

stability of supply chains and industrial chains. The rural financial services system

will be improved. Financial support will be provided to ensure that the work done to

consolidate and further the achievements of poverty eradication be linked up

effectively with rural revitalization efforts, while financial support policies for regions

lifted out of poverty will be kept generally stable. Credit supply will be increased to

support key agricultural fields, such as development of the seed industry and food

security. Measures will also be taken to broaden the range of collaterals according to

laws and regulations and to innovate rural financial products and services. The PBC

will push further ahead with the project aimed at enhancing commercial banks’

capacity to provide financial services for MSMEs, taking steps to improve external

incentives and constraints as well as banks’ internal policy arrangements, and to foster,

through the application of science and technology, a long-term mechanism whereby

banks will have the confidence, willingness, ability, and professionalism to make

loans. Additionally, financial institutions will be guided to step up credit support for

the manufacturing sector and other key fields. Firmly adhering to the principle that

housing is for living in, not for speculation, and that the real estate market shall not be

used to provide a short-term stimulus to the economy, the PBC will remain committed

to stabilizing land prices, housing prices, and expectations and will maintain the

continuity, consistency, and stability of real estate finance policies. It will also

implement rules for prudential management of real estate finance and improve

financial support policies for the rental of housing.

Fourth, the PBC will deepen the market-oriented interest rate and exchange rate

reforms to smooth the channels of monetary policy transmission. To enhance the

market-oriented interest rate formation and transmission mechanism, it will improve

the central bank policy rate system in which OMO rates are taken as short-term policy

rates and MLF rates as medium-term policy rates, and it will advance the reform of

money market benchmark rates so that market rates are guided to move around policy

rates. Continued efforts will be made to deepen the LPR reform, to consolidate the

achievements made in lowering real lending rates, and in the process to gradually give

rise to market-oriented deposit rates. The self-regulatory mechanism for market rate

pricing will play its part in regulating the conduct of deposit rate pricing while deposit

management will be tightened, with locally incorporated banks prohibited from

providing cross-regional deposit services. And the requirement will be reinforced that

lending entities of all types give explicit indications of annualized loan rates so as to

safeguard a level playing field in the market and to protect the rights and interests of

consumers. Taking steady steps to deepen the market-oriented exchange rate reform,

the PBC will improve the managed floating exchange rate regime based on market

supply and demand with reference to a basket of currencies, maintain the flexibility of

the RMB exchange rate, and explore the role of the exchange rate in macroeconomic

management and as an automatic stabilizer for the balance of payments. Work will be

done to stabilize market expectations, to guide enterprises and financial institutions to

be risk-neutral, and to keep the RMB exchange rate basically stable at an adaptive and

equilibrium level. The PBC will steadily advance the convertibility of the RMB under

the capital account, improve the policy framework and the infrastructure for

cross-border use of the RMB, and facilitate the use of the RMB in cross-border trade

and investment.

Fifth, the PBC will strengthen fundamental institution building in financial

markets so that they can play an effective role in stabilizing growth, promoting

structural adjustments, advancing reform, and guarding against risks. It will

support bond financing by private enterprises and enhance the ability of the financial

sector to serve the real economy. It will implement the Administrative Measures for

Information Disclosures Regarding Corporate Debenture Bonds to promote a

unification of standards. The mechanism of bond default risk prevention and

resolution will be improved in line with market-oriented and law-based principles.

The PBC will enhance coordinated regulation over financial market infrastructure and

accelerate steps to advance the interconnectivity between bond market infrastructure

so as to ensure that financial markets are generally safe and stable while performing

efficiently. Efforts will be made to steadily move ahead with the two-way opening-up

of the bond market and to introduce more medium and long-term investors.

Sixth, the PBC will push further ahead with the reform of financial institutions

and make continued efforts to improve corporate governance and optimize

financial supply. Focusing on strengthening corporate governance, more work will be

done to deepen the reform of large commercial banks and to establish a modern

financial enterprise system with Chinese characteristics. Large banks will be guided to

shift their focus of services to the primary level and increase efficiency so as to

provide better services for MSBs and private enterprises. Through improvements of

monetary, regulatory and tax rules, small and medium-sized banks and rural credit

cooperatives will be encouraged to focus on their main duties and businesses and to

reassume their roles in serving local needs and their original purposes, while an

effective mechanism of checks and balances in governance will be established.

Measures will be taken to reform and optimize development finance and policy

finance and to carry out classified accounting so that they will be better able to

support national strategies.

Seventh, the PBC will improve the systems of financial risk prevention, early

warning, resolution, and accountability. It will safeguard financial security,

improve the systems of financial risk prevention, early warning, resolution, and

accountability, take quick action to shore up the weaknesses of regulatory institutions,

and firmly defend the bottom line that no systemic risk should occur. Work will be

done to ensure that the development of financial innovations be brought under

prudential regulation and to stabilize and improve the quality and competitiveness of

inclusive financial services. Stress tests fully covering the banking system will be

conducted. To enhance the soundness of financial institutions and their sustainable

management capacity, the PBC will support banks, particularly small and

medium-sized banks, to replenish capital through multiple channels and improve their

governance. Efforts will be intensified to set aside loss provisions for non-performing

loans and carry out write-offs while deposit insurance institution building and the

organizational structure will be improved. Endeavors to defuse risks will be advanced

prudently, with particular attention paid to wrapping up ongoing risk resolutions. The

PBC will further define the respective responsibilities of all concerned parties to see

that they truly perform their duties and join efforts to resolve risks. A possible

resurgence of risks must be contained. Under no circumstances will local risks be

allowed to evolve into systemic risks, nor will regional risks be allowed to evolve into

national risks.