(Yicai Global) Nov. 20 -- China will continue to improve its policy framework, which involves the use of both monetary tools and macro-prudential regulation to address risks while supporting growth, the country's central bank said in an article in its third-quarter monetary policy implementation report.
While traditional monetary policy can handle instability during economic cycles, it alone cannot deal with fluctuations during financial cycles, and that is where macro-prudential regulation comes in, the People's Bank of China (PBOC) said. The framework responded well to high inflation, but is not ideal for adressing the potentially huge impact of asset price chances and financial market volatility, the bank said.
When the economic cycle and the financial cycle are not synchronized, they may head in different or opposite directions, leading to the conflict and failure of macro-control policies. Before the subprime mortgage crisis in 2007, the global consumer price index was stable while commodity prices and MSCI global indices climbed more than 90 percent and housing prices in major American cities rose more than 50 percent, posing a significant risk.
It is difficult for the central bank to effectively balance the economic cycle and the financial cycle simply with the help of monetary policy tools. The introduction of macro-prudential policies allows the bank to deal with such situations. By improving macro-prudential policy framework and coordinating with monetary policies, the central bank can better integrate monetary stability with financial stability. Macro-prudential policies act directly and intensively on the financial system and can "prescribe the right remedy," focusing on safeguarding financial stability and preventing systemic financial risks, the bank said.
The two core indicators for evaluating the financial cycle are generalized or broader sense credit and real estate prices, the PBOC said. The former represents the financing conditions, and the latter reflects investors' perceptions and attitudes toward risk.
Next, the central bank will continue to improve twin-pillar regulatory framework of monetary policy and macro-prudential policy. It will make the monetary policy framework better by using price to regulate and furthering the marketization reform of interest rates and exchange rates. More financial activities, markets, institutions and infrastructure will be covered by the macro-prudential policy framework, the report said.