China’s 15th Five-Year Plan for making the country a financial powerhouse has recently been officially released. It is reported that the plan systematically clarifies the key tasks for this purpose, including improving the financial macroeconomic regulatory system, strengthening financial supervision, preventing and resolving financial risks, serving the real economy, promoting high-quality financial development, and expanding high-level financial opening-up. The specific details are yet to be announced. Judging from media statements, the content of the financial powerhouse 15th Five-Year Plan is largely consistent with the requirements for the financial sector in the broader 15th Five-Year Plan, and is seamlessly connected with the contents and paths proposed at the Central Financial Work Conference. It is also worth noting that in the 15th Five-Year Plan, becoming a financial powerhouse has been designated as one of the 16 targets to strengthen the country. This certainly reflects the importance of financial development for China’s macroeconomic stability, further demonstrating finance's vital role as a key driver for economic and social development.
In the plan, building a financial powerhouse is positioned under the section "accelerating the construction of a high-level socialist market economy and enhancing the momentum for high-quality development". This actually means that achieving a financial powerhouse status basically relies on reform. Establishing a new financial market system is one of the primary paths to achieving high-quality financial development. Against this backdrop, the reform of the People's Bank of China (PBoC)'s monetary policy framework and policy system has also become a crucial part for improving the financial macroeconomic regulatory system to achieve this purpose. In 2024, PBoC Governor Pan Gongsheng discussed the direction and content of macroeconomic regulatory system reforms, focusing on supporting the achievement of "dual targets" through what is called "dual pillars". That is, improving the dual-pillar regulatory framework of monetary policy and macroprudential policy to achieve the dual targets of currency stability and financial stability. This is for the purpose of enhancing the country’s modern monetary policy framework, macroprudential policy, as well as the disposal mechanism for systemic financial risk prevention. It also aims to improve the financial market and financial market infrastructure systems, and deepen supply-side structural reform in the finance sector. Finally, its objective is also to build a new system of open finance at a higher level, and promote the internationalization of the yuan.
Pan noted that improving the modern monetary policy framework with Chinese characteristics is central to the modern central bank system. This requires gradually shifting from quantitative targets toward price-based tools such as interest rates, while expanding the policy toolkit and enhancing policy communication and transparency. For China to build a financial powerhouse, researchers at ANBOUND believe that monetary policy needs not only to focus on policy trends and specific implementation, but more importantly, to place changes in monetary policy within the institutional reforms. This will likely be a new consideration for observing and analyzing monetary policy trends and approaches for quite some time to come, and is also an indispensable variable for understanding and anticipating the direction and tone of monetary policy.
Regarding changes to the monetary policy framework, the central bank has also repeatedly mentioned the reform concept of transitioning to "price-based monetary policy". Indeed, Pan has addressed this concept on multiple occasions in various settings. His recent speech noted that this involves continuously optimizing monetary policy intermediate variables, downplaying the focus on quantitative targets, particularly the focus on a single credit channel, and treating financial aggregates more as observational and predictive indicators.
Greater emphasis should be placed on using interest rates as a key policy tool, while improving how market-based interest rates are determined, regulated, and transmitted through the economy. This includes strengthening the mechanism for managing short-term interest rates, further improving policy rates and the institutions that support them, and increasing the role of central bank policy rates in guiding market interest rates. It also means improving how deposit and lending rates are priced, giving businesses more options when choosing benchmarks for loan pricing. At the same time, regulators should strengthen the implementation and oversight of interest-rate policies and continue addressing excessive, inefficient competition and the circulation of funds within the financial sector without reaching the real economy. Finally, policymakers should establish a credible, regular, and institutionalized system for communicating monetary policy to the market. Policy announcements and guidance should be professional, practical, and clear, helping businesses and financial markets better understand policy direction and form more stable expectations.
As researchers at ANBOUND have repeatedly noted, "price-based monetary policy" should probably not be simply understood as the policy basis for "interest rate cuts". In fact, the new "price-based" policy framework is moving further and further away from the existing inertial thinking of "reserve requirement ratio cuts and interest rate cuts". Even with the rebounding global interest rates, China’s "moderate easing" faces the pressure of widening internal and external interest rate differentials. Shifting to "price-based monetary policy" is actually a path taken by central banks in developed countries like the Federal Reserve, and is likewise a policy framework commonly adopted by current financial powerhouses. In this regard, this is closely related to changes in the current financial situation in China.
Amid the overall economic slowdown, the PBoC mentioned that the supply and demand for social financing has shifted, with the bottleneck of credit expansion shifting from the supply side to the demand side. This new situation corresponds to the shift of economic growth from scale expansion to high-quality development, and correspondingly, financial development is also shifting from scale growth to the enhancement of financial efficiency. On the one hand, overall social financing and monetary growth are gradually slowing down. On the other hand, direct financing is gradually replacing bank indirect financing to become the primary method of social financing. More worth noting is that under demand-driven financial expansion, the regulatory effect of monetary policy has actually weakened. The financing bottleneck for market entities is no longer financial channels or money supply, but genuine market demand. Whether in investment or consumption, related financial demands are slowing down, which means that simply increasing the money supply cannot genuinely resolve the expansion of real demand.
When demand reaches its limits, future financial expansion will have to come from two areas, i.e., continued but limited growth in incremental volume, and greater efficiency in the use of existing assets. In this environment, monetary policy, which previously relied on two main pillars, namely scale and price, is increasingly losing traction. Broad-based reserve requirement ratio (RRR) cuts and interest rate cuts are having a diminishing impact on the economy. Under the new price-based monetary policy framework, broad-based rate cuts will remain part of the toolkit, but more precise adjustments will also be made through the development of the interest rate corridor and marginal changes in policy rates. This multi-pronged approach is aimed at improving monetary policy transmission, with greater emphasis on how market interest rates respond, thereby enhancing the efficiency and effectiveness of policy. The new price-based tools will also be used in more structural and targeted ways, such as through the current use of relending facilities. At the same time, under the new framework, scale-based tools, including RRR cuts and reverse repos, are returning to their role of managing and replenishing liquidity, rather than serving as the primary instruments of monetary policy. The key focus is now on ensuring that policy rates are effectively transmitted to the market while maintaining adequate market liquidity. As a result, the policy signaling effect of tools such as the MLF and reverse repos will become weaker.
It is worth mentioning that treasury bond trading has gradually entered the PBoC's horizon in recent years, becoming one of the mediums through which the central bank influences capital market interest rates and liquidity. Although researchers at ANBOUND have emphasized its risks, from the current perspective, the central bank has been cautious in its operational approach without causing market panic or misjudgment. In the short term, this change can likewise be called a tool for the PBoC to regulate liquidity. However, in the long run, this holds greater significance as a new tool for base money expansion. In fact, under previous compulsory foreign exchange settlement and capital controls, foreign exchange purchases had been one of the primary ways of base money injection in China. This situation changed with the intensification of U.S.-China geopolitical coopetition. China's foreign exchange reserves have long been maintained at the USD 3 trillion level, resulting in a lack of tools for base money injection. The expansion of treasury bond trading scale not only provides a medium for the central bank to guarantee market liquidity, but also brings new room for the future expansion of yuan credit and the injection of yuan base money. Therefore, in the long run, under the long-term trend of U.S.-China coopetition, this move will make proactive preparations for the "decoupling" of Chinese and U.S. currencies, and provide the possibility for the independence of yuan credit. This move is also one of the foundations enabling the yuan to truly move toward internationalization. This is also an important consideration for current yuan exchange rate policy. Similarly, under the grand trend of yuan internationalization, exchange rate stability yields greater benefits than appreciation or depreciation, forming the fundamental consideration for future yuan exchange rate policy.
As it stands, the current financial powerhouse and economic development situation in China are closely intertwined. Amid increasingly prominent K-shaped economic divergence, whether dealing with aggregate counter-cyclical adjustment or stock structural adjustment, the new monetary policy framework faces an increasingly complex development environment. The reform itself carries a certain degree of policy effect, but implementing systemic monetary policy also faces multiple practical constraints. This is not only a requirement for a financial powerhouse, but also holds practical significance for preventing financial risks. Particularly amid narrowing net interest margins, financial institutions face considerable pressure. Moreover, as the Federal Reserve turns toward a contractionary policy and begins raising interest rates, moderate easing of monetary policy is likely not a long-term inevitable outcome. The central bank's mention of avoiding tight competition carries the meaning of rectifying the interest rate market, which also carries the implication of cooperating with market clearing. Therefore, the result of changes in the policy framework is likely not a signal of comprehensive mass stimulus, but rather structural adjustment that integrates both tightening with loosening.
As ANBOUND’s founder Kung Chan previously noted, the new monetary policy framework needs to return to the framework of the "quadrilateral risk matrix", i.e., striking a balance between interest rates and exchange rates, aggregates and structure, new quality productive forces and real estate stability, as well as stability and progress, achieving moderately loose dynamic adaptation through interest rate mechanism reform. This reflects a form of multilateral risk constraint within China's macroeconomic environment.
Final analysis conclusion:
As China is making itself a financial powerhouse, its monetary policy requires not only attention to policy trends and specific implementation, but more importantly, placing changes in the policy within the institutional reforms of the policy framework. All in all, establishing and improving "price-based monetary policy" is not only an option under the multilateral risk constraints of the new economic situation, but also a necessity of financial development itself.
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Dr. Wei Hongxu is a Senior Economist of China Macro-Economy Research Center at ANBOUND, an independent think tank.
