China's 'Yeongkkeul' Economic Stimulus... People's Bank Net Profit Attribution

Surplus Profits Exceeding 1 Trillion Yuan to Be Allocated for Livelihood Support
China Likely to Implement Additional Interest Rate Cuts and Financial Policies Soon

[Asia Economy Beijing=Special Correspondent Jo Young-shin] The People's Bank of China, the central bank of China, will transfer more than 1 trillion yuan (approximately 195 trillion Korean won) of last year's net profit to the central government. This move reflects the Chinese leadership's intention to stimulate the economy by injecting funds and is interpreted as a sign of actively expanding fiscal spending. Some critics argue that the Chinese leadership is even using the central bank's profits as ammunition for economic stimulus.

[Image source=Yonhap News]

According to Chinese media such as Jeil Jaegyeong on the 10th, the People's Bank of China decided to transfer more than 1 trillion yuan of last year's net profit, excluding reserves, to the government to support available fiscal resources. Chinese media explained that this measure follows last year's Central Economic Work Conference and the National People's Congress (NPC) work report. The People's Bank stated that the funds exceeding 1 trillion yuan will be used for employment stabilization, corporate support, and tax refunds.

China Launches Full-Scale Fiscal Policy for Economic Stimulus

Premier Li Keqiang mentioned in the NPC work report on the 5th that the profits of state-owned enterprises would be used for fiscal stability, with a total of 2.3 trillion yuan being transferred to the central government. The People's Bank of China is one of the state-owned enterprises mentioned by Premier Li, and it appears that more than 1 trillion yuan of the total 2.3 trillion yuan will be provided by the People's Bank. The use of surplus profits from state-owned enterprises is interpreted as the Chinese government's intention to increase fiscal spending without raising the national debt ratio.

In fact, Premier Li announced that the fiscal deficit ratio relative to this year's gross domestic product (GDP) would be lowered to 2.8%. The fiscal deficit ratio relative to GDP presented this year is lower than last year's 3.2%. It is 0.8 percentage points lower than the 3.6% during the peak of COVID-19 in 2020. Nevertheless, the central government's budget for this year increased by 12.8% from the previous year to 13.4045 trillion yuan.

Chinese media reported that transferring profits gained from managing foreign exchange reserves to the central government is a measure in accordance with the People's Bank of China Law, and that central banks of other countries such as the United States also transfer surplus profits, excluding reserves, to their central governments. They explained that using surplus profits from state-owned enterprises for fiscal purposes is neither a loophole nor a trick.

The People's Bank of China is known not to have transferred surplus profits to the central government in 2020 and last year, during the height of COVID-19. This measure is seen as an active fiscal policy by the Chinese government to achieve this year's economic growth target of "5.5% or higher."

[Image source=Yonhap News]

China's All-Out Effort for Economic Stimulus

Some in China analyze that this transfer of surplus profits from the People's Bank of China has the same effect as a 0.5 percentage point cut in the reserve requirement ratio (RRR).

The People's Bank of China lowered the RRR by 0.5 percentage points on December 15 last year. Immediately after the cut announcement, the People's Bank expected that 1.2 trillion yuan worth of funds would be supplied to the market. The RRR refers to the cash ratio that commercial banks must deposit with the central bank to return money to depositors. When the RRR decreases, commercial banks have more ammunition to use for loans. In terms of amount, the "more than 1 trillion yuan" transfer and the "1.2 trillion yuan" effect are similar, but the People's Bank's measure is a fiscal policy characterized by fiscal expenditure.

Regarding this, Jeil Jaegyeong pointed out that while the RRR cut expands long-term liquidity of commercial banks and increases lending capacity, the transfer of surplus profits from the central bank is not credit creation, so their nature is completely different. Therefore, it is explained that this measure is unrelated to financial policies such as interest rate cuts.

Interest Rate Cuts and Financial Policies Likely to Be Implemented Together

The Chinese government faced criticism last year for its financial and fiscal policies. Although it promised to implement an "active" fiscal policy, the actual execution was not proactive, and monetary easing policies were not pursued with the real estate market in mind.

When international raw material prices such as coal surged in the second half of last year, changes occurred in the Chinese leadership's policies. In the third quarter "China Monetary Policy Implementation Report," the Chinese financial authorities removed phrases such as ▲avoiding excessive monetary easing ▲maintaining normal monetary policy ▲comprehensive monetary management. This left room for monetary policy to change depending on circumstances at any time.

In fact, the People's Bank of China lowered the loan prime rate (LPR, 1-year maturity), which is equivalent to the benchmark interest rate, by 0.05 percentage points in December last year and by 0.10 percentage points in January this year. The People's Bank had previously cut the RRR and the Medium-term Lending Facility (MLF) loan rate by 0.5 percentage points and 0.1 percentage points, respectively.

Within the Chinese financial sector, there is a forecast that since the Chinese government set the economic growth target higher than initially expected at "5.5% or higher," additional interest rate cuts could be implemented as early as this month or by the second quarter at the latest.

Moreover, the increased uncertainty in the global economy due to Russia's invasion of Ukraine is also cited as a background for the prompt implementation of additional interest rate cuts.

Wang Qing, chief analyst at Dongfang Jincheng, said, "It cannot be said that the transfer of surplus profits from the People's Bank of China eliminates the possibility of an RRR cut." He added, "Considering the escalation of external geopolitical tensions and the pace of domestic consumption recovery, additional macro policy efforts are needed to achieve this year's growth target." He further stated that macroeconomic management policies, including additional interest rate cuts, will be decided based on macro indicators such as investment and consumption in January and February and loan data in February.

This content was produced with the assistance of AI translation services.