China Monetary Policy Report Q2 2023

China Monetary Policy Report

Q2 2023

(August 17, 2023)

Monetary Policy Analysis Group of

the People’s Bank of China

Executive Summary

Since the beginning of 2023, under the strong leadership of the CPC Central

Committee with Comrade Xi Jinping at its core, the Chinese economy continued to

recover with an upward trend. In H1, the GDP grew 5.5 percent year on year, laying a

good foundation for reaching the socio-economic development goals for the entire

year. The CPI rose 0.7 percent year on year, remaining generally stable. Following

the guidance of Xi Jinping Thought on Socialism with Chinese Characteristics for a

New Era, the People's Bank of China (PBOC) resolutely implemented the decisions

and arrangements of the CPC Central Committee and the State Council. Pursuing the

principle of seeking progress while taking stability as a top priority, it implemented a

sound monetary policy in a targeted and effective manner and contributed to overall

improvements in economic performance.

First, money and credit witnessed reasonable growth. The PBOC injected liquidity

through multiple channels, including required reserve ratio (RRR) cuts, central bank

lending and discounts, the medium-term lending facility (MLF) operations, and open

market operations (OMOs), to keep liquidity adequate at a reasonable level. It

encouraged financial institutions to consolidate their credit support for the real

economy so as to enhance the stability and the sustainability of aggregate credit

growth. Second, the financing costs for the real economy remained stable with a

slight decline. With the policy rate playing a guiding role, the rates for the June and

August OMO repo operations and the MLF dropped 20 and 25 basis points (bps),

respectively. As the loan prime rate (LPR) reform continuously unleashed its potential,

the financing costs for businesses and the borrowing costs for residents remained

stable with a downward trend. The mechanism for market-oriented adjustments of

deposit rates played an important role, and the mechanism for dynamic adjustments to

first-home mortgage rates was still in effect. Third, the structural monetary policy

toolkit continued to play its role. While making full use of the existing structural

policy tools, the PBOC increased the quotas for central bank lending and discounts for

rural development and micro and small businesses (MSBs) and prolonged the use of

several temporary tools, such as inclusive MSB loan facilities. In addition, the terms

were extended for some policies under the 16 financial measures to bolster the real

estate market, and the special central bank lending for troubled property developers

and the loan support scheme for rental housing were implemented. Fourth, the

internal and external equilibria were maintained. The PBOC deepened the market-

oriented reform of the exchange rate while upholding the decisive role of the market

in the RMB exchange rate formation and giving play to the role of the exchange rate

as an automatic stabilizer for the macro economy and the balance of payments. Fifth,

risk prevention and resolution were enhanced. Following market principles and the

rule of law for risk resolution, the PBOC established a working framework for bank

risk monitoring, early warnings, and hard-constrained early corrections based on

different levels and stages so as to firmly defend the bottom line whereby no systemic

financial risks will occur.

Overall, the monetary policy this year has remained forward-looking, effective, and

sustainable, with its pace and force being properly managed in line with the situation,

thus creating a sound monetary and financial environment for the economic recovery.

Money and credit witnessed reasonable growth. RMB loans saw a cumulative rise of

RMB15.7 trillion in H1, RMB2.0 trillion more than their growth during the same

period of the previous year. At end-June, RMB loans, broad money (M2), and

outstanding aggregate financing to the real economy (AFRE) recorded year-on-year

growth of 11.3 percent, 11.3 percent, and 9.0 percent, respectively. The credit

structure continued to improve. At end-June, inclusive MSB loans and medium and

long-term (MLT) loans to the manufacturing sector grew by 26.1 percent and 40.3

percent year on year, respectively. Loan rates declined notably. In June, the weighted

average rate on new corporate loans and on personal housing loans registered 3.95

percent and 4.11 percent, respectively, down 0.21 percentage points and 0.51

percentage points year on year and representing a historical low. The RMB exchange

rate moved in both directions. The exchange rate of the RMB against the U.S. dollar

dropped beyond seven in May but then appreciated 1.3 percent in July. The market

witnessed rational and orderly foreign exchange sales and purchases, and market

expectations remained basically stable.

Currently, China’s economy has returned to normal and is steadily functioning on a

path of high-quality development. However, it should be noted that the global

political and economic situations are complex and grim, the cumulative effects of the

rapid rate hikes in the developed economies remain, and momentum for an economic

recovery has waned, while domestically the economy is facing multiple challenges,

including insufficient demand, hardships suffered by some businesses, and existing

and potential risks in some key areas. Still, China’s economy is blessed with huge

development resilience and potential, as its sound fundamentals for long-term

development remain unchanged and advantages and positive factors are on the rise.

Therefore, we should maintain a strategic focus and enhance confidence in

development. During the next stage, guided by Xi Jinping Thought on Socialism with

Chinese Characteristics for a New Era, the PBOC will thoroughly implement the

guidelines of the 20th CPC National Congress and the Central Economic Work

Conference. Upholding the general principle of pursuing progress while ensuring

stability, it will apply the new development philosophy fully, faithfully,

and comprehensively, and it will play its part in accelerating the building of a new

development paradigm. It will deepen the reform and opening-up, integrate

implementation of the strategy to expand domestic demand with efforts to deepen the

supply-side structural reform, and strengthen macro-policy adjustments. Also, by

developing a modern central banking system and fully exploring the efficacy of

III

monetary and credit policies, the PBOC will continue its efforts to achieve better

economic performance, enhanced endogenous forces, and improved social

expectations as well as resolution of existing and potential risks so as to help

effectively upgrade and appropriately expand economic output.

The PBOC will pursue a sound monetary policy in a targeted and effective manner,

and it will give better play to the role of monetary policy instruments in adjusting both

the aggregate and the structure so as to provide solid support for recovery and

development of the real economy. Using a mix of monetary policy instruments, it will

keep liquidity adequate at a reasonable level, and it will ensure that the growth rates

of M2 and the AFRE continue to be basically in line with nominal economic growth.

It will continue to deepen the market-oriented interest rate reform, optimize

the central bank policy rate system, unleash the potential of the LPR reform, and give

play to the important role of the mechanism for market-oriented deposit rate

adjustments so as to ensure that the financing costs for businesses and

the borrowing costs for residents remain stable with a slight decline. The structural

monetary policy instruments will be targeted, appropriate, and flexible. Those still in

effect will be properly used, and those that support structural problem-intensive areas

will be prolonged. Meanwhile, support will be continuously enhanced for MSBs, sci-

tech innovation, and green development. Considering the great changes in supply and

demand relations, the real estate policies will be adjusted and improved as appropriate

to promote steady and sound development of the market. Maintaining the positive role

of finance in promoting consumption, stabilizing investment, and expanding domestic

demand, the PBOC will work to keep prices basically stable. Pursuing a managed

floating exchange rate regime based on market supply and demand with reference to

a basket of currencies, it will stabilize expectations with a mix of policies to keep the

RMB exchange rate basically stable at an adaptive and equilibrium level and to firmly

guard against risks arising from exchange rate overshooting. The PBOC will prevent

and resolve financial risks in key areas, coordinate efforts to resolve local debt risks

with financial support, and steadily promote risk alleviation for small and medium-

sized financial institutions through reforms, thereby firmly defending the bottom line

whereby no systemic financial risks will occur.

Contents

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

I. Liquidity in the banking system was adequate at a reasonable level ..................................... 1

II. Lending by financial institutions grew rapidly, and lending rates remained at historic lows2

III. Money supply and the AFRE grew at a rapid pace ..............................................................7

IV. The RMB exchange rate remained basically stable at an adaptive and equilibrium level .12

Part 2 Monetary Policy Operations .............................................................................................. 14

I. Conducting open market operations in a flexible manner .................................................... 14

II. Conducting MLF and SLF operations ................................................................................. 15

III. Lowering the RRR for financial institutions ......................................................................15

IV. Further improving the macro-prudential system and the management framework ........... 16

V. Giving full play to the role of monetary policies to optimize the structure ........................ 16

VI. Enhancing the efficiency and role of credit policy in structural guidance ........................ 20

VII. Improving the formation and transmission mechanism of the market-based interest rate21

VIII. Deepening the market-based reform of the RMB exchange rate ....................................22

IX. Forestalling and defusing financial risks ............................................................................25

X. Improving the capability to serve cross-border trade, investment, and financing..............25

Part 3 Financial Market Conditions ............................................................................................. 26

I. Financial market overview .................................................................................................... 26

II. The development of institutional arrangements in financial markets ................................. 32

Part 4 Macroeconomic Overview ..................................................................................................34

I. Global economic and financial developments ...................................................................... 34

II. Macroeconomic developments in China ............................................................................. 38

Part 5. Monetary Policy Outlook .................................................................................................. 44

I. Outlook for the Chinese economy........................................................................................44

II. Outlook for monetary policy in the next stage .................................................................... 46

Boxes

Box 1 A Proper Assessment of the Profits of China’s Commercial Banks ........................................5

Box 2 Financial Support for a Macroeconomic Recovery .................................................................9

Box 3 Continuous Support from Structural Monetary Policies in Key Areas and Weak Links ...... 18

Box 4 The RMB Exchange Rate Remains Basically Stable at an Adaptive and Equilibrium Level..

...........................................................................................................................................................23

Tables

Table 1 The Structure of RMB Loans in H1 2023............................................................................ 3

Table 2 New RMB Loans from Financial Institutions in H1 2023 .................................................... 3

Table 3 Weighted Average Interest Rates on New Loans Issued in June 2023 ..................................4

Table 4 Shares of RMB Lending Rates at Different Levels from January to June 2023 ...................4

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

January to June 2023 ...........................................................................................................................4

Table 6 The Structure of RMB Deposits in H1 2023 ......................................................................... 7

Table 7 Aggregate Financing to the Real Economy in H1 2023........................................................8

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

Spot Market in H1 2023 ................................................................................................................... 26

Table 9 Fund Flows Among Financial Institutions in H1 2023 ....................................................... 27

Table 10 Interest Rate Swap Transactions in H1 2023 .....................................................................28

Table 11 Bond Issuances in H1 2023 ............................................................................................... 30

Table 12 Asset Allocations in the Insurance Sector at End-June 2023 ............................................ 31

Table 13 Macroeconomic and Financial Indicators in the Major Advanced Economies ................ 36

Table 14 Floor Area of Newly Started, Under Construction, and Completed Real Estate Projects in

H1 2023 .............................................................................................................................................43

Figures

Figure 1 Movement of Money Market Interest Rates ........................................................................ 2

Figure 2 The YOY Growth of Outstanding Broad Money (M2) and the AFRE ............................... 8

Figure 3 Monthly RMB Settlements under the Current Account.................................................... 13

Figure 4 Yield Curves of Government Securities in the Interbank Market ..................................... 29

Part 1 Money and Credit Analysis

Since the beginning of 2023, the People’s Bank of China has followed the guidance of

Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era and has

fully implemented the guiding principles of the 20th National Congress of the

Communist Party of China (CPC) as well as the Central Economic Work Conference

and the requirements set forth in the Report on the Work of the Government. Taking

stability as its top priority and pursuing progress while ensuring stability, it has

implemented a sound monetary policy in a targeted and effective manner, increased

the intensity of counter-cyclical adjustments, and scientifically managed market

expectations to effectively serve the real economy. As a result, money, credit, and the

AFRE are witnessing reasonable growth, overall financing costs are declining steadily,

the credit structure is improving continuously, and the RMB exchange rate is

remaining basically stable at a reasonable and equilibrium level, thereby strongly

supporting the overall economic recovery and improvement.

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

In the first half of 2023, the PBOC employed a mix of instruments, such as the

required reserve ratio (RRR) cut, central bank lending and discounts, the medium-

term lending facility (MLF), and open market operations (OMOs), to inject liquidity

into the economy in a targeted and effective manner and to keep liquidity adequate at

a reasonable level in the banking system, thereby creating a favorable liquidity

environment to promote financial support for the high-quality development of the real

economy. In March, the PBOC cut the RRR by 0.25 percentage points across

the board to release long-term liquidity and strengthen support for the real economy.

In June and August, interest rates on open market reverse repo operations and the

MLF rate decreased in succession, significantly boosting market confidence. Since

the beginning of 2023, the money market interest rate has been steadily moving

around the central bank’s open market reverse repo operation rate, and the market

interest rate at the end of H1 has also been relatively stable. At end-June, the excess

reserve ratio for financial institutions registered 1.6 percent, up 0.1 percentage points

year on year.

Figure 1 Movement of Money Market Interest Rates

Source: www.chinamoney.com.cn.

II. Lending by financial institutions grew rapidly, and lending rates remained at

historic lows

Credit aggregates grew rapidly. In the first half of 2023, credit aggregates grew at a

more stable pace and maintained year-on-year (YOY) growth on a high base, better

meeting the effective loan demand of the real economy. At end-June, outstanding

loans issued by financial institutions in domestic and foreign currencies grew 10.6

percent year on year to RMB235.7 trillion, increasing RMB15.7 trillion from

the beginning of 2023 or a YOY acceleration of RMB1.8 trillion. Outstanding RMB

loans grew 11.3 percent year on year to RMB230.6 trillion, up RMB15.7 trillion from

the beginning of 2023 or a YOY acceleration of RMB2.0 trillion.

The credit structure has been improving. At end-June, medium and long-term (MLT)

loans to enterprises and public entities grew by RMB9.7 trillion from the beginning of

2023, accounting for 75.8 percent of total corporate loans. The YOY growth rate of

MLT loans to the manufacturing sector registered 40.3 percent, 29.0 percentage points

higher than the YOY growth of total loans, which maintained their rapid growth since

2020. The YOY growth rate of MLT loans to the infrastructure sector was 15.8

percent, 4.5 percentage points higher than the YOY growth of total loans. The YOY

growth rate of loans to “specialized, sophisticated, distinctive, and innovative” SMEs

was 20.4 percent, 9.1 percentage points higher than the YOY growth of total loans.

Outstanding inclusive loans to MSBs grew 26.1 percent year on year, 14.8 percentage

points higher than the YOY growth of total loans. A total of 59.35 million MSBs were

supported, a rise of 13.3 percent year on year.

Table 1 The Structure of RMB Loans in H1 2023

Unit: RMB100 million

Outstanding

amount at end-

June

YOY growth

(%)

Increase from

the beginning

of the year

YOY

acceleration

RMB loans to:

2305767

11.3%

157324

20180

Households

785611

6.1%

27951

5723

Enterprises and public entities

1503308

14.0%

128150

14193

Non-banking financial

institutions

5805

32.6%

-15

-120

Overseas

11043

37.8%

1239

383

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 from Financial Institutions in H1 2023

Unit: RMB100 million

Increase from

the beginning of the

year

YOY acceleration

Chinese-funded large-sized banks

85814

12215

Chinese-funded small and medium-sized banks

71757

5513

Small-sized rural financial institutions

20248

1864

Foreign-funded financial institutions

-166

-61

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 rate of loans remained at a historic low. The

PBOC continuously deepened the market-oriented reform of interest rates, effectively

tapping into the loan prime rate (LPR) reform and bringing into play the key role of

the market-based adjustment mechanism for deposit interest rates so as to promote a

steady decline in actual lending rates. In June, the one-year LPR and the over-five-

year LPR stood at 3.55 percent and 4.20 percent, respectively, both of which were 0.1

percentage points lower compared with December 2022. In June, the weighted

average interest rate on new loans recorded 4.19 percent, down 0.22 percentage points

year on year. In particular, the weighted average interest rate on ordinary loans

registered 4.48 percent, down 0.28 percentage points year on year, and the weighted

average interest rate on corporate loans was 3.95 percent, down 0.21 percentage

points year on year, both of which remained at historic lows. In June, the share of

ordinary loans with rates above, at, and below the LPR registered 56.67 percent, 5.59

percent, and 37.74 percent, respectively.

Table 3 Weighted Average Interest Rates on New Loans Issued in June 2023

Unit: %

June

Change from last

December

YOY Change

Weighted average interest rate on new loans

4.19

0.05

-0.22

on ordinary loans

4.48

-0.09

-0.28

of which: on corporate loans

3.95

-0.02

-0.21

on bill financing

2.03

0.43

0.17

on mortgage loans

4.11

-0.15

-0.51

Source: The People’s Bank of China.

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

2023

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

37.38

6.28

56.34

16.65

19.06

10.22

5.70

4.72

February

37.60

6.02

56.38

16.32

16.84

10.28

6.54

6.40

March

36.96

6.88

56.16

17.10

17.57

10.57

6.18

4.74

April

36.62

6.20

57.18

15.54

17.18

11.14

7.08

6.24

May

36.28

5.52

58.20

13.98

16.79

11.71

7.98

7.74

June

37.74

5.59

56.67

17.79

17.31

10.81

6.09

4.68

Source: The People’s Bank of China.

Interest rates on foreign-currency deposits and loans edged up. In June, the weighted

average interest rates on demand large-value USD-denominated deposits and on

large-value USD-denominated deposits with maturities within three months registered

1.65 percent and 4.46 percent, respectively, up 0.01 and 0.23 percentage points from

March 2023, respectively. The weighted average interest rates on USD-denominated

loans with maturities within three months and with maturities between three months

(including three months) and six months registered 5.68 percent and 5.63 percent, up

0.43 and 0.30 percentage points from March 2023, respectively.

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

Loans from January to June 2023

Unit:%

Month

Large-value deposits

Loans

Demand

deposits

Within 3

months

3–6

months

(including

3 months)

6–12

months

(including

6 months)

1 year

Over 1

year

Within

months

3–6

months

(including

3 months)

6–12

months

(including

6 months)

year

Over 1

year

January

1.25

3.99

4.62

5.34

5.46

4.96

4.91

5.12

5.10

5.53

5.99

February

1.42

4.18

5.10

5.51

5.50

5.44

5.08

5.23

5.39

5.46

5.58

March

1.64

4.23

5.02

5.53

5.67

5.54

5.25

5.33

5.11

5.34

5.86

April

1.76

4.50

5.29

5.49

4.91

5.72

5.39

5.47

5.49

5.64

5.62

May

1.78

4.63

4.65

5.68

5.63

5.64

5.55

5.46

5.52

5.39

5.98

June

1.65

4.46

5.29

5.63

5.47

5.75

5.68

5.63

5.46

5.41

5.71

Source: The People’s Bank of China.

Box 1 A Proper Assessment of the Profits of China’s Commercial Banks

In recent years, the profits of China’s commercial banks have maintained growth.

However, their net interest margins (NIMs) have continued to narrow, leading to a

deceleration in profit growth. Commercial banks face capital constraints in issuing

loans to the real economy and require a capital buffer against risks. Their capital

adequacy ratios are subject to an explicit national regulatory standard. To maintain

sound operations and to prevent risks, commercial banks should keep profits and

NIMs at a proper level, which will be favorable for them to provide more sustainable

support for the real economy.

Although the asset scale and total profits of China’s commercial banks are

growing gradually, their NIMs and returns on assets (ROA) are sinking. At end-

Q1 2023, the total assets of China’s commercial banks registered RMB337 trillion,

growing at an average annual rate of 10.4 percent during the past five years. As the

market-based reform of interest rates advances, competition in the credit market will

escalate, leading to a decline in loan rates and the edging down of bank profitability.

This was especially noteworthy after the outbreak of the COVID-19. In Q1 2023, net

profits of commercial banks posted RMB667.9 billion, up 1.3 percent year on year,

6.1 percentage points lower than the YOY growth in Q1 2022. The NIM and ROA

posted 1.74 percent and 0.81 percent, respectively, down 0.23 and 0.08 percentage

points year on year, respectively. As the profitability of unit assets deteriorates, the

growth of profits are mainly attributable to an expansion in the scale of assets. To put

it in another way, a reduction in prices is made up for by an increase in the amount.

Throughout the world, the NIMs of the banking sectors in the U.S., Japan, Germany,

and other major advanced economies have generally decreased since 2010. In 2022,

the NIM in the U.S. banking sector temporarily rebounded, mainly due to the

aggressive interest rate hike by the U.S. Federal Reserve (Fed). According to statistics

released by the Federal Deposit Insurance Corporation (FDIC), in Q1 2023 the NIM

of commercial banks in the U.S. was 3.31 percent, almost twice that in China and up

0.77 percentage points year on year.

Figure: NIMs of Commercial Banks in China and the U.S.

The net profits of China’s commercial banks are mainly used to

replenish common equity tier 1 capital and to distribute dividends to

shareholders, which will exert an influence on the real economy through the

leverage of capital. In contrast with overseas counterparts, capital replenishments of

domestic banks suffer from limited channels, multiple barriers, and slow progress,

leading to a huge capital gap among them. For instance, the average P/B for A-share

listed banks is 0.58, restricting their ability to replenish common equity tier

1 capital by issuing common equities or other external channels. Therefore, while

expanding external channels, it is particularly important to retain the ability to

replenish capital through internal channels. Maintaining an appropriate profit growth

rate is an important internal channel for capital replenishment that can enhance the

ability of banks to provide support for the real economy and prevent risks,

thus boosting the confidence of domestic and overseas investors in China’s macro

economy. From 2018 to 2022, about two-thirds of the cumulative net profits of six

major state-owned commercial banks was reserved to replenish their own common

equity tier 1 capital, ensuring that their capital adequacy ratios would satisfy the

international regulatory requirements. The profits used for capital replenishment

influenced the real economy through credit issuance and other channels. The

remainder were mainly used to distribute dividends to shareholders.

Currently, the Chinese economy faces various difficulties and challenges. Against

this backdrop, we need to give further play to the role of banks in serving the

real economy and to level the virtuous circulation between the financial sector

and the economy. As the financial cycle is seldom in parallel with the

economic cycle and exposure of the credit risks of banks takes time, we should

prepare in terms of both financial resources and risk buffers. We should allow banks

to maintain their sound operations through reasonable means, which, in the

meanwhile, will enhance their capability to provide sustainable support for the

development of the real economy. It is common for the profitability

of commercial banks to fluctuate with the economic cycle. We should make a

reasonable assessment of this and refrain from making any over-interpretations.

Deposits grew significantly. At end-June, outstanding deposits in domestic and

foreign currencies at all financial institutions had increased 10.5 percent year on year

to RMB284.7 trillion, up RMB20.2 trillion from the beginning of 2023 and an

acceleration of RMB1.1 trillion year on year. Outstanding RMB deposits grew 11.0

percent year on year to RMB278.6 trillion, an increase of RMB20.1 trillion from

the beginning of 2023 and an acceleration of RMB1.3 trillion year on year.

Outstanding deposits in foreign currencies stood at USD837.4 billion, down

USD16.6 billion from the beginning of 2023 and a deceleration of USD6.3 billion

year on year.

Table 6 The Structure of RMB Deposits in H1 2023

Unit: RMB100 million

Outstanding

deposits at end-

June

YOY growth

(%)

Increase from

the beginning

of the year

YOY

acceleration

RMB deposits:

2786205

11.0%

200997

12966

Households

1322387

17.2%

119147

15882

Non-financial enterprises

795170

6.2%

49649

-3218

Public entities

351238

7.0%

20813

3828

Fiscal entities

49888

-10.4%

-125

-5186

Non-banking financial

institutions

249698

6.8%

10840

1328

Overseas

17823

13.7%

673

332

Source: The People’s Bank of China.

III. Money supply and the AFRE grew at a rapid pace

The monetary aggregate grew at a rapid pace. At end-June, outstanding broad money

M2 registered RMB287.3 trillion, up 11.3 percent year on year; narrow money M1

and currency in circulation M0 registered RMB69.6 trillion and RMB10.5 trillion,

respectively, up 3.1 percent and 9.8 percent year on year, respectively. The first half of

2023 witnessed a net cash injection of RMB78.9 billion, a decrease of

RMB440.5 billion year on year.

Figure 2 The YOY Growth of Outstanding Broad Money (M2) and the AFRE

Source: The People’s Bank of China.

According to preliminary statistics, the outstanding AFRE reached RMB365.5 trillion

at end-June and its YOY growth registered 9.0 percent. In the first half of 2023, the

AFRE increment totaled RMB21.5 trillion, RMB475.4 billion more than that in the

first half of 2022. The AFRE was characterized by the following structural features:

first, RMB loans witnessed rapid growth. In the first half of 2023, the increment in

RMB loans issued by financial institutions to the real economy grew by RMB2.0

trillion year on year to RMB15.6 trillion, accounting for 72.4 percent of the AFRE

increment during the same period. Second, in the first half of 2023, new

government bonds decreased year on year, and the increment in net financing of

government bonds was RMB1.27 trillion less than that in the previous year; the

increment in direct corporate financing decreased significantly year on year, with the

increment in corporate bonds and domestic equity financing by non-financial

enterprises decreasing by RMB788.3 billion and RMB43.2 billion year on year,

respectively. Third, there was a recovery in off-balance-sheet financing. In the first

half of 2023, new entrusted loans, trust loans, and undiscounted bankers’ acceptances

grew by RMB79.7 billion, RMB398 billion, and RMB261.9 billion year on year,

respectively. Fourth, asset-backed securities of depository institutions decreased by a

larger margin year on year, while loans written off increased at a slower pace year on

year.

Table 7 Aggregate Financing to the Real Economy in H1 2023

End-June 2023

H1 2023

Stock

(RMB trillion)

YOY growth

(%)

Flow

(RMB100

million)

YOY change

(RMB100

million)

The AFRE

365.45

9.0

215488

4754

Of which: RMB loans

228.86

11.2

156047

19909

Foreign-currency loans

1.89

-18.9

-242

-700

End-June 2023

H1 2023

(RMB equivalent)

Entrusted loans

11.32

4.1

743

797

Trust loans

3.77

-5.1

228

3980

Undiscounted bankers’

acceptances

2.75

-2.8

852

2619

Corporate bonds

31.34

-0.4

11678

-7883

Government bonds

63.57

10.1

33783

-12749

Domestic equity

financing by non-financial

enterprises

11.1

11.4

4596

-432

Other financing

10.64

6.8

2306

-1692

Of which: Asset-

backed securities of depository

institutions

1.83

-12.3

-1512

-712

Loans written off

7.98

14.9

4655

-307

Notes: ① The AFRE (stock) refers to outstanding funds provided by the financial system to the

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

the financial system to the real economy within a certain period of time. ②Since January 2023,

the PBOC has included three types of non-deposit financial institutions in the banking industry,

namely consumer finance companies, wealth management companies, and financial asset

investment companies within the scope of financial statistics. Therefore, adjustments will be made

to the data on “RMB loans issued by the real economy” and “loans written off” in the scale of

social financing. ③YOY statistics in the table are on a comparable basis.

Sources: The People’s Bank of China, National Administration of Financial Regulation, China

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

Association of Financial Market Institutional Investors, etc.

Box 2 Financial Support for a Macroeconomic Recovery

Since the beginning of 2023, the PBOC has implemented a sound monetary policy in

a targeted and effective manner and has strengthened counter-cyclical adjustments

to bolster a sustained recovery and an overall rebounding of the economy. At end-

June, M2, the AFRE, and RMB loans witnessed a YOY growth of 11.3 percent, 9.0

percent, and 11.3 percent, respectively. YOY growth of GDP came in at 4.5 percent in

Q1 and rose to 6.3 percent in Q2.

The sustainability of financial support for the real economy has significantly

improved. In H1, headline financial data were good, the credit structure continued to

improve, the financing costs of the real economy were brought down steadily, and the

transmission effect on the macro economy gradually became apparent. In terms of

aggregates, the PBOC has maintained an appropriate money supply. It has

managed the pace and intensity of policy operations in response to the changing

markets, employed a mix of monetary policy instruments, kept liquidity adequate at a

reasonable level, and maintained reasonable growth of credit and aggregate financing.

In March, the PBOC cut the RRR by 0.25 percentage points, releasing long-term

liquidity of over RMB500 billion. Presently, growth of M2, the AFRE, and loans

have all maintained high levels at about 10 percent, higher than the nominal GDP

growth rate of about 5 percent in H1 and creating a favorable monetary and financial

environment for a sustained improvement in the economy. In terms of prices, the

PBOC has stimulated market demand in a steady and effective manner. It

has continuously brought into play the important roles of the LPR reform and the

market-based adjustment mechanism for deposit rates, and it has steadily brought

down both the funding costs of enterprises and the lending rates for residents,

thus contributing to tapping into the potential of market demand. In June, the OMO

rate and the MLF rate were guided to decline by 0.1 percentage points, and the

weighted average interest rates on corporate loans, residential mortgages, and

inclusive MSB loans registered 3.95 percent, 4.11 percent and 4.68 percent

respectively, down 21, 51, and 51 bps from the corresponding period of the previous

year, respectively, and all were at historic lows. The financial system has been cutting

down on its profits in favor of the real economy. In August, the OMO rate and the

MLF rate were guided to decline by another 0.1 percentage points and 0.15

percentage points respectively, and counter-cyclical adjustments were strengthened

when appropriate to bolster a sustained economic recovery. In terms of the structure,

the PBOC has stepped up its efforts to promote a transformation of the economic

growth mode. It has continuously increased its support for small and micro private

enterprises, technological innovation, and green development, and it has vigorously

supported the cultivation of endogenous economic growth drivers. The PBOC has

also increased the quota for central bank lending to support rural development

and central bank discounts, it has extended the terms of inclusive MSB loan facilities

as well as facilities to support the delivery of presold residential housing projects, and

it has continued to implement both the carbon emissions reduction facility (CERF)

and the special central bank lending for clean and efficient coal use. At end-June,

outstanding MLT loans to the manufacturing sector, green loans, inclusive MSB loans,

and loans to “specialized, sophisticated, distinctive and innovative” small and

medium-sized enterprises (SMEs) grew by 40.3 percent, 38.4 percent, 26.1 percent,

and 20.4 percent year on year, respectively, substantially higher than the growth rate

of all loans. The growth rate of real estate development loans has rebounded, with a

YOY growth rate of 5.3 percent at end-June, 1.6 percentage points higher than that at

end-2022.

Figure: YOY Growth Rates of MLT Loans to the Manufacturing Sector, Inclusive MSB Loans

and All Loans

The macro economy is expected to be on an upward trajectory, and economic

figures will closely match the financial data in the future. As macroeconomic

policies and financial policies are forward-looking and are usually introduced at an

early stage, leading to a time lag between implementation of the policies and recovery

of the real economy, financial data are currently temporarily ahead of the economic

figures. The economic recovery is far from smooth. It will take time for consumption

and the overall economy to recover in the post-pandemic era. From a global

perspective, the growth rates of M2 were generally higher than the nominal GDP

growth rates in both the U.S. and the EU when the COVID-19 containment measures

were lifted in 2021. In China, the pandemic has been over for only about half a year.

The willingness of consumers to spend money is declining as compared with the pre-

pandemic levels and private investment is waiting for an additional impetus. Both of

these factors are quite normal on the road towards a post-pandemic recovery.

Currently, China’s post-pandemic economic recovery is gradually moving on the

right track. Economic circulation and the income of residents are both picking up, and

the YOY growth rate of infrastructure investment continues to be higher than the

YOY growth rate of all investments. In H1, the number of domestic tourists and the

amount of revenue from tourism grew by over 60 percent and 90 percent year on year,

respectively, and exports of independent brands owned by private enterprises

achieved two-digit growth. China’s GDP growth reached 5.5 percent in HI 2023 and

the annual GDP growth target is expected to be attained. China’s GDP growth

maintains at a relatively high level among the major economies, and the gap between

economic and financial growth will gradually be bridged. From a long-term

perspective, the fundamentals sustaining China's long-term growth will remain

unchanged. In the next 15 years, the middle-income group will grow to over 800

million, with a huge market potential. The driving force for sci-tech innovation is

growing, green transition is steadily advancing, and the consumer market is gradually

recovering and upgraded. The momentum for high-quality development is increasing.

There is sufficient policy space to address any unexpected challenge or change. China

has full confidence and patience to achieve steady and sustained development of its

economy.

Going forward, the PBOC, in accordance with the arrangements made by the CPC

Central Committee and the State Council, will continue to implement its sound

monetary policy in a targeted and effective manner, manage the pace and intensity of

policy operations based on market changes, and strive to maintain the momentum for

an economic recovery. It will also strengthen counter-cyclical adjustments, build up

its monetary policy toolbox, and make stepped-up efforts to expand domestic

demand, boost market confidence, and prevent risks so as to effectively upgrade and

appropriately expand economic output.

IV. The RMB exchange rate remained basically stable at an adaptive and

equilibrium level

Since the beginning of 2023, cross-border capital flows have been stable and orderly,

supply and demand in the foreign exchange market have basically been in equilibrium,

and the RMB exchange rate is expected to be generally stable. Against the backdrop

of a complex and volatile international situation, the major developed economies

have continued to adjust their monetary policies, while the RMB exchange rate has

fluctuated in both directions, playing its role as an auto stabilizer in macroeconomic

management and the balance of payments and generally maintaining basic stability at

a reasonable and equilibrium level. In the first half of 2023, based on market supply

and demand, the RMB exchange rate depreciated against a basket of currencies. At

end-June, the China Foreign Exchange Trade System (CFETS) and the RMB

Exchange Rate Index based on the special drawing rights (SDRs) basket closed at

96.74 and 92.17, respectively, depreciating 2.0 percent and 4.1 percent, respectively,

from end-2022. According to calculations by the Bank for International Settlements

(BIS), from end-2022 to end-June 2023 the nominal effective exchange rate (NEER)

and the real effective exchange rate (REER) of the RMB depreciated 2.5 percent

and 5.7 percent, respectively. From 2005, when the reform of the RMB exchange-rate

formation regime began, to end-June 2023, the NEER and REER of the RMB

appreciated 40.6 percent and 37.2 percent, respectively. At end-June, the central parity

of the RMB against the U.S. dollar was 7.2258, depreciating 3.6 percent from end-

2022. At end-July, the central parity of the RMB against the U.S. dollar was 7.1305,

appreciating 1.3 percent from end-June. In the first half of the year, the annualized

volatility rate of the RMB against the U.S. dollar was 5.3 percent, up 0.1 percent year

on year.

The internationalization of the RMB is steadily advancing, with increased use of the

RMB in cross-border trade and investment. In the first half of the year, cross-border

RMB settlements increased 20 percent year on year to RMB24.5 trillion, accounting

for 57 percent of the total amount of domestic and foreign-currency settlements

during the same period. Specifically, RMB receipts and payments posted RMB12.0

trillion and RMB12.4 trillion, respectively. Cross-border RMB settlements under

the current account grew by 37 percent year on year to RMB6.3 trillion. In particular,

RMB settlements under trade in goods registered RMB4.8 trillion, while RMB

settlements under trade in services and under other items registered RMB1.5 trillion.

Cross-border RMB settlements under the capital account registered RMB18.2 trillion,

an increase of 15 percent year on year. In the first half of 2023, the proportion

of cross-border RMB settlements under trade in goods and direct investments

registered 23 percent and 70 percent of local and foreign currency cross-border

settlements, respectively, with YOY growth of 6.7 and 6.6 percentage points,

respectively, which is the highest level in recent years.

Figure 3 Monthly RMB Settlements under the Current Account

Source: The People’s Bank of China.

The attractiveness of RMB assets is constantly increasing. As of end-June, the

total balance of financial assets. such as domestic RMB stocks, bonds, loans, and

deposits held by overseas entities, was about RMB10 trillion. The offshore RMB

market was relatively active. From January to June, the issuance of offshore

RMB bonds (excluding negotiable certificates of deposit) increased by 34 percent

year on year, and by end-June the balance of RMB loans in Hong Kong had

increased by 69 percent year on year.

Part 2 Monetary Policy Operations

In Q2 2023, the PBOC resolutely implemented the decisions and arrangements

made by the CPC Central Committee and the State Council. Following the principle

of seeking stability while making progress, the PBOC pursued a sound monetary

policy in a targeted and effective manner. It strengthened counter-cyclical adjustments,

kept liquidity adequate at a reasonable level, and enhanced the stability and

sustainability of credit aggregate growth. The PBOC facilitated a steady decline in

the costs of corporate financing and consumer credit, guided financial institutions to

scale up financial support for weak links and key areas, such as financial inclusion,

sci-tech innovation, and green development, and promoted a continuous recovery and

overall rebounding of the national economy.

I. Conducting open market operations in a flexible manner

Conducting reverse repos in a flexible and targeted manner. In Q2, the

PBOC closely followed the macroeconomic and financial developments and

strengthened the assessment and monitoring of liquidity supply and demand in

the banking system. It managed the intensity and pace of open market operations in a

flexible manner so as to offset the influence of reserve deposits, tax payments,

government bond issuances, regulatory assessments at quarter-ends and other factors

in the supply and demand of liquidity in a timely manner, and it kept liquidity in

the banking system adequate at a reasonable level. In late June, the PBOC timely

increased reverse repos in response to the mounting demand for short-term funds

among financial institutions and the emergence of liquidity pressures in some

financial institutions. From June 25 to June 30, the PBOC conducted 7-day reverse

repos in a total amount of RMB1.169 trillion, fully satisfying the demand of primary

dealers and ensuring a sufficient supply of liquidity by end-H1 and the smooth

operation of all market participants in the money market by quarter-end.

Guiding market rates to move down moderately. On June 13, the rate of open

market 7-day reverse repos dropped by 10 basis points to 1.90 percent, reflecting

market supply and demand of funds and sending a policy signal from the central bank

of enhancing counter-cyclical adjustments and stabilizing market expectations,

thereby boosting market confidence. From the reduction of the reverse repo rate to

end-June, the weighted average rate of 7-day reverse repos for depository institutions

in the interbank market (DR007) averaged 1.94 percent, moving around the rate of

open market 7-day reverse repos without great volatility. On August 15, the rate of

open market 7-day reverse repos decreased by another 10 basis points to 1.80 percent,

further boosting market confidence.

In addition, in Q2 the PBOC continued to conduct central bank bill swap (CBS)

operations on a monthly basis, which were conducive to improving liquidity in the

secondary market of bank-issued perpetual bonds. Meanwhile, the PBOC continued to

issue central bank bills in Hong Kong on a regular basis. At end-June, the balance

of central bank bills in Hong Kong reached RMB80 billion, playing a positive role in

promoting the sound development of the offshore RMB money market and the bond

market.

II. Conducting MLF and SLF operations

Conducting MLF operations to fully meet market demand. From December 2022

to August 2023, the MLF was renewed for nine consecutive months, with the amount

of newly-issued MLFs exceeding that of maturing MLFs on each occasion. The MLF

rate moved down by 10 and 15 basis points in June and August, respectively, ensuring

the supply of medium and long-term liquidity and giving effective play to the guiding

role of interest rates. In H1, the PBOC conducted a total of RMB2.291 trillion of

MLF operations, all of which were with a maturity of one year and with those in Q2

reaching RMB532 billion. The MLF rates in the first five months and in June were

2.75 percent and 2.65 percent, respectively. At end-June, outstanding MLFs registered

RMB5.191 trillion, an increase of RMB641 billion from the beginning of 2023.

Conducting standing lending facility(SLF) operations. Locally-incorporated

financial institutions were provided with a sufficient amount of short-term liquidity

support as needed so as to stabilize market expectations, strengthen the stability of

liquidity in the banking system, and prevent liquidity risks. In H1, the

PBOC conducted a total of RMB11.98 billion in SLF operations, among which those

in Q2 reached RMB4.31 billion. At end-June, outstanding SLF operations registered

RMB3.48 billion. The SLF rate continued to serve as the ceiling of the interest

rate corridor, thereby helping to maintain smooth operations in the money market. At

end-June, the overnight, 7-day, and 1-month SLF rates stood at 2.75 percent, 2.90

percent, and 3.25 percent, respectively, all down 0.1 percentage points from end-Q1.

In August, SLF rates of all maturities declined by another 0.1 percentage points.

III. Lowering the RRR for financial institutions

Lowering the RRR to inject long-term liquidity. On March 27, 2023, the PBOC

reduced the RRR for financial institutions (excluding those that had already

implemented an RRR of 5 percent) by 0.25 percentage points. It freed up over

RMB500 billion in long-term funds and saved about RMB6 billion in the cost of

funds in the banking sector. This marked the 15th RRR cut since 2018; the current

weighted average RRR for financial institutions is 7.6 percent, with the lowest RRR

in three brackets at 5 percent, which strongly supports the development of key areas,

such as inclusive finance.

IV. Further improving the macro-prudential system and the management

framework

Giving full play to the role of the macro-prudential assessment (MPA) in

optimizing the credit structure and promoting the supply-side structural reform

of the financial sector. In Q2, the PBOC further optimized the MPA framework and

guided financial institutions to maintain appropriate credit aggregates at a steady pace

and to step up support for inclusive MSB loans, especially unsecured inclusive MSB

loans, for medium and long-term financing to the manufacturing sector.

Refining the regulatory framework for systemically important financial

institutions. The PBOC strengthened the monitoring and analysis of systemically

important banks (SIBs) and worked with related regulators to guide the SIBs to

update and improve their recovery and resolution plans, making them more practical

and effective. The PBOC urged the SIBs to fulfill the additional capital and leverage

ratio requirements on time and to disclose the assessment indicators and the relevant

supervisory indicators in accordance with requirements so as to promote their sound

operations.

Adjusting the macro-prudential adjustment parameter for cross-border

financing. On July 20, 2023, in order to further improve macro-prudential

management of unified cross-border financing and to continue to expand the sources

of cross-border funds for enterprises and financial institutions and to optimize their

asset-liability structure, the PBOC and the State Administration of Foreign Exchange

(SAFE) decided to raise the macro-prudential adjustment parameter for cross-border

financing for enterprises and financial institutions from 1.25 to 1.5. This was the first

time it was raised to 1.5 since the creation of this tool in 2016.

V. Giving full play to the role of monetary policies to optimize the structure

Actively using central bank lending in support of rural development and

MSBs, central bank discounts, pledged supplementary lending (PSL), and other

policy instruments. Central bank lending in support of rural development and MSBs

was utilized to guide locally incorporated financial institutions to expand their credit

supply for rural revitalization. Central bank lending for poverty alleviation was rolled

over according to current regulations so as to consolidate the achievements in poverty

alleviation. The PBOC promoted coordinated regional development by continuously

guiding locally incorporated financial institutions in ten provinces to effectively use

policy instruments, such as central bank lending, so as to expand the credit supply for

weak links within the region. On June 30, the PBOC decided to increase central bank

lending and discount quotas in support of rural development and MSBs by a total of

RMB200 billion. The move is aimed at further ramping up financial support for

agriculture, rural areas, farmers, MSBs, and private enterprises, providing liquidity in

a targeted manner, reducing funding costs, helping expand employment, and boosting

recovery of the endogenous drivers for economic growth. On August 16, the PBOC

decided to increase the central bank lending quota in support of rural development

and MSBs by RMB35 billion and to provide financial support for flood prevention

and relief as well as post-disaster reconstruction in disaster-hit provinces

(municipalities). At end-June, outstanding central bank lending in support of rural

development, in support of MSBs, and for poverty alleviation posted

RMB565.8 billion, RMB1.4231 trillion, and RMB138.2 billion, respectively.

Outstanding central bank discounts registered RMB595 billion and the outstanding

PSL posted RMB2.9896 trillion.

Continuously utilizing instruments in support of inclusive MSB loans. At end-

June, through these instruments, the PBOC provided incentive funding in the amount

of RMB49.8 billion, an increase of RMB22.3 billion from the beginning of 2023. It

supported an increase of RMB2.7 trillion in inclusive MSB loans issued by locally

incorporated financial institutions, up RMB1.1 trillion from the beginning of 2023. In

order to continuously support the development of MSBs, the instruments in support of

inclusive MSB loans has been extended until end-2024. The PBOC has decided to

incentivize financial institutions at 1 percent of the incremental balance of their

inclusive MSB loans, down from 2 percent.

Implementing the carbon emission reduction facility (CERF) in tandem with the

targeted central bank lending facility for clean and efficient use of coal. At end-

June, the outstanding amount through these two PBOC instruments registered

RMB453 billion and RMB245.9 billion, respectively, an increase of

RMB143.3 billion and RMB164.8 billion, respectively, from the beginning of 2023.

In order to sustain financial support for green development and a stable energy supply,

the CERF has been extended until end-2024 and the targeted central bank lending

facility for clean and efficient use of coal has been extended until end-2023.

Targeted central bank lending facilities for inclusive elderly care continue to

play a guiding role. At end-June, outstanding central bank lending for inclusive

elderly care posted RMB1.3 billion, an increase of RMB600 million from

the beginning of 2023. Central bank lending for sci-tech innovation,

targeted central bank lending for equipment upgrading and renovation, and

targeted central bank lending for transport and logistics all expired and the PBOC

exited from these facilities, but outstanding funds that were issued are still available.

The outstanding amount posted RMB320 billion, RMB169.4 billion, and

RMB43.4 billion, respectively, an increase of RMB120 billion, RMB88.5 billion, and

RMB19.2 billion from the beginning of 2023.

Leveraging policy tools to promote the steady and sound development of the real

estate market. The PBOC implemented the loan support scheme to ensure deliveries

of presold housing projects. Its balance at end-June was RMB500 million.

For continuous policy support, the scheme will be extended until end-May 2024. The

PBOC launched targeted central bank lending to help ease real estate developers’

difficulties and the support scheme for rental housing loans, thereby supporting

national financial asset management corporations to acquire existing housing projects

of distressed real estate developers and encouraging financial institutions to issue

long-term loans for rental housing purchases by specialized rental housing operators

in pilot cities.

Box 3 Continuous Support from Structural Monetary Policies

in Key Areas and Weak Links

In recent years, the PBOC has resolutely implemented the decisions and arrangements

of the CPC Central Committee and the State Council and it has continuously adjusted

and improved its system of structural monetary policy instruments with a focus on

providing support for key areas and weak links in the national economy and serving

high-quality development. The central bank mainly considers two factors when

deciding on the creation, extension, or exit of structural monetary policies: First,

prominent structural problems in economic performance. For instance, to ease the

difficulties often faced by micro and small enterprises in accessing affordable

financing, the PBOC has created various structural instruments, including long-term

structural instruments, such as central bank lending and discounts. and temporary

structural instruments, such as inclusive MSB lending facilities. Second, financial

institutions enhancing their willingness and capabilities to serve specific areas. In

areas such as supporting green and low carbon development and sci-tech innovation,

financial institutions still face a relatively high "green premium" and a "risk

premium." The PBOC has created instruments, including the CERF

and central banking lending for sci-tech innovation to give full play to the leveraging

and guidance roles. In light of the evolving nature of these two factors, structural

instruments may change with economic development and policy guidance, and hence

most of the instruments are temporary. Since the beginning of 2023, a

proper balance between "entry" and "exit" has been maintained in structural

monetary-policy instruments, which has played a positive role in encouraging and

guiding financial institutions to optimize the allocation of credit resources and in

promoting high-quality economic development.

"Entry" is mainly reflected in serving high-quality development. The aggregate

amount of structural instruments remained at an appropriate level. As of end-June

2023, outstanding structural monetary-policy instruments registered RMB6.9 trillion,

accounting for about 16 percent of the PBOC's total assets, a ratio basically on par

with similar financial systems, such as those in the euro area, the UK, and Japan.

Structural instruments prioritized areas that most needed bank funding support in the

following respects: First, providing continuous support for inclusive finance.

Small and micro enterprises mirror the economic vitality, which requires continued

and consolidated support for inclusive finance, such as MSBs. Since the beginning of

2023, the PBOC has provided an additional RMB235 billion through central bank

lending and discounts in support of rural development and small businesses. It has

extended implementation of the inclusive MSB lending facility until end-2024, and it

has adjusted the ratio of incentive funds as appropriate. Second, providing continued

support for areas such as green and low carbon development and sci-tech

innovation. Green development and sci-tech innovation, which call for more effective

and stronger funding support, are priorities to advance the momentum for economic

growth . Since the beginning of 2023, the PBOC has extended both the CERF and the

targeted central bank lending for clean and effective coal use. For broader

policy benefits, it also expanded coverage of the CERF by including some foreign-

funded banks and locally incorporated banks. Meanwhile, in accordance with the

action plan to support financing for sci-tech enterprises, it gave play to the incentive

role of central bank lending and other policy instruments to channel continued support

from financial institutions to such enterprises. Third, supporting the smooth

functioning of the real estate market. The implementation of targeted policies has

met the reasonable funding needs of the real estate market, thus contributing to the

stability of consumption, investment, and the macro economy. The loan support

scheme to ensure deliveries of presold housing projects has been extended until end-

May 2024 so as to encourage and guide financial institutions to provide financial

support for eligible projects. A scheme to provide support for rental housing has been

steadily implemented in pilot cities by supporting diversified and full-cycle financial

services of financial institutions for the housing rental market.

"Exit" in a smooth and orderly manner. The PBOC will evaluate the structural

instruments when they expire. An orderly exit will take place as scheduled when some

instruments attain their expected goals. For instance, the central bank lending

facilities, with their respective quotas of RMB300 billion and RMB500 billion,

were created at the beginning of 2020 to support the COVID-19 response and to

ensure supply as well as the recovery of production, and the exit came as scheduled at

end-June 2020. When some policy instruments expire, an appropriate roll-over of

existing funds will help achieve a gradual and progressive exit. For some facilities

that were introduced in 2022, such as central bank lending for sci-tech innovation,

targeted central bank lending for equipment upgrading, and targeted central banking

for transportation and logistics, to achieve potentially the best "progressive" exit

effects, the roll-overs of existing funds will be up to three to five years when the

PBOC exits from those instruments that will be expiring consecutively this year. The

PBOC will continue to implement policy instruments in areas that call for necessary

or continued support, including inclusive finance and green and low carbon

development.

In the next step, the PBOC will fully leverage the dual functions of monetary

policies in terms of aggregate amount and structure. Structural instruments will

further focus on key areas, be reasonable and appropriate, and achieve a

proper balance between entry and exit. The PBOC will continue to adjust and refine

the monetary-policy instruments in light of economic and financial developments,

guide financial institutions to beef up support for key areas and weak links, and, when

necessary, create new instruments in accordance with the decisions and arrangements

of the CPC Central Committee and the State Council to better serve the high-quality

development of the economy.

VI. Enhancing the efficiency and role of credit policy in structural guidance

Constantly improving the quality and effectiveness of financial services for MSBs.

The PBOC actively promoted the project to enhance financial services for micro,

small, and medium enterprises (MSMEs), accelerated the establishment of the long-

term mechanism for boosting the confidence, willingness, capacity, and

professionalism of financial institutions to issue loans, improved the assessment

scheme for credit policy in terms of supporting MSBs, and continuously enhanced the

willingness, capability, and sustainability of financial institutions to serve the MSBs.

The PBOC timely promoted the expansion of coverage and the increase in volume

of bond financing supporting tools for private enterprises, namely, “the second arrow.”

Since the expansion of coverage in November 2022, support has been provided for a

total of RMB284 billion bonds issued by private enterprises. The PBOC also

increased the credit sources of banks to support small enterprises,

supporting commercial banks to issue a total of RMB124 billion special

financial bonds for SMEs in H1 2023. All these moves were aimed at promoting an

increase in the aggregate, expanding the coverage, and reducing the cost of MSB

financing. At end-June, outstanding inclusive MSB loans and the number of inclusive

MSBs that were granted loans registered a YOY increase of 26.1 percent and 13.3

percent, respectively, and the interest rate on newly issued inclusive MSB loans in

June posted 4.40 percent.

Constantly improving financial services for rural revitalization. Together with the

National Administration of Financial Regulation, the China Securities Regulatory

Commission, the Ministry of Finance, and the Ministry of Agriculture and Rural

Affairs, the PBOC issued the Guiding Opinions on Providing Financial Support for

Advancing Rural Revitalization Across the Board and Stepping Up Efforts to Build Up

China's Strength in Agriculture. It guided financial institutions to optimize resource

allocations by continuously increasing the supply of financial resources for major

areas, such as stable production and secure supplies of grain, key agricultural products,

sci-tech equipment innovation, and green development in agriculture, and the high-

quality development of rural industries. It assessed the financial institutions in terms

of their providing financial services for rural revitalization and it enhanced the

application of the assessment results so as to further enhance the quality and

efficiency of financial services for rural revitalization. At end-June, outstanding agro-

related loans registered a YOY increase of 16 percent, reaching RMB54.6 trillion.

Continuously providing financial services for the manufacturing sector and sci-

tech innovation. Jointly with the administrative agencies of the relevant industries,

the PBOC engaged in match-making between financial institutions and key

investment projects and enterprises in the manufacturing sector and sci-tech

innovation. It drafted the Action Plan for Enhancing Financial Support for Sci-tech

Enterprises, improving the policy framework for serving sci-tech enterprises and

providing incentives to guide financial institutions to increase credit support for the

manufacturing sector and for sci-tech innovation. As of end-June, outstanding

medium and long-term loans to the manufacturing sector grew by 40.3 percent year

on year to RMB11.6 trillion, while medium and long-term loans to the high-tech

manufacturing sector and loans to sci-tech small and medium enterprises reached

RMB2.5 trillion and RMB2.4 trillion, with a YOY growth of 41.5 and 25.1 percent,

respectively. The PBOC actively gave play to the financing function of the

interbank bond market, innovatively launched financing instruments for sci-tech

innovation, such as financial bonds for innovation and entrepreneurship and sci-tech

innovation bills, and encouraged good use of “the second arrow,” namely, guarantee

and credit enhancement instruments, supporting the bond financing of eligible sci-

tech enterprises and leading enterprises in the manufacturing sector. As of end-June,

outstanding bills for sci-tech innovation issued by sci-tech enterprises reached

RMB226.4 billion, outstanding bonds issued by sci-tech corporations stood at

RMB225.8 billion, and outstanding bonds issued in the interbank market by

enterprises in strategic emerging industries amounted to approximately

RMB660 billion.

VII. Improving the formation and transmission mechanism of the market-based

interest rate

Continuously unleashing the benefits of the LPR reform and giving play to the

role of the market-based adjustment mechanism in deposit interest rates.

The benefits of the LPR reform have been continuously unleashed, the rates for

OMOs and the MLF have been guided to decline by 0.1 percentage points, the one-

year and over-five-year LPR issued in June were guided to decline 0.1 percentage

points, promoting a decline in actual loan rates. In June 2023, the weighted average

interest rate of corporate loans stood at 3.95 percent, declining 0.21 percentage points

year on year and remaining at a historical low. In August, the rates of OMOs and the

MLF rate declined by another 0.1 and 0.15 percentage points,

respectively, continuously giving play to the guidance role of policy rates. The effect

of the market-based adjustment mechanism on deposit interest rates came further into

play. In June, the major banks voluntarily lowered the quoted deposit rates of some

maturities and simultaneously lowered the authorized ceiling of internal rates. This

was the second time that commercial banks had voluntarily adjusted the posted

deposit rates in accordance with their operational needs and market supply and

demand since September 2022, thereby further enhancing the market-based deposit

rates and the transmission efficiency of interest rates.

Continuing to implement the dynamic adjustment mechanism for first-home

mortgage interest rates. By the end of June 2023, 100 cities had reduced or removed

the interest rate floor on first-home loans, among all 343 cities (municipal or above).

In particular, 87 cities lowered the interest rate floor for first-home loans 10 to

40 basis points lower than the national floor, and 13 cities removed the floor for first-

home loans. The adjustment and improvement in the interest rate policy for first-home

loans have brought down mortgage rates. Nationally, the weighted average interest

rate for newly issued personal mortgage loans in June registered 4.11 percent, down

0.51 percentage points year on year.

VIII. Deepening the market-based reform of the RMB exchange rate

The PBOC continued to advance the market-based reform of the RMB exchange

rate and to improve the managed floating exchange-rate regime based on market

supply and demand with reference to a basket of currencies. Ensuring that the

market plays a decisive role in determining the exchange rate, the PBOC gave play to

the role of the exchange rate as an auto stabilizer for macroeconomic management

and for the balance of payments. With comprehensive measures, the PBOC

strengthened expectation guidance and kept the RMB exchange rate basically stable at

an adaptive and equilibrium level. In H1, the highest and lowest RMB central parities

against the U.S. dollar were 6.7130 and 7.2258, respectively. During the 118 trading

days, the RMB appreciated on 53 days and depreciated on 65 days. The biggest

intraday appreciation and depreciation were 1.0 percent (654 bps) and 0.9 percent

(630 bps), respectively. The RMB witnessed both an appreciation and a depreciation

against major international currencies, with two-way fluctuations. As of end-June,

the central parity of the RMB against the Japanese yen had appreciated 4.5 percent

from end-2022, while the central parity of the RMB against the U.S. dollar, the euro,

and the pound sterling had depreciated 3.6 percent, 5.8 percent, and 8.2 percent,

respectively, during the same period. From 2005 when the reform of the RMB

exchange-rate formation regime began to end-June 2023, the RMB appreciated by

a cumulative 14.5 percent, 27.1 percent, and 45.8 percent, respectively, against the

U.S. dollar, the euro, and the Japanese yen. Direct RMB trading was rather buoyant in

the interbank foreign exchange market with stable liquidity, the exchange costs for

microeconomic entities such as enterprises were reduced, and bilateral trade and

investment were promoted.

Box 4 The RMB Exchange Rate Remains Basically Stable at

an Adaptive and Equilibrium Level

In the first four months of 2023, the RMB exchange rate remained basically stable

against the U.S. dollar, with an cumulative appreciation of 0.6 percent for the central

parity. Since the beginning of May, domestic and overseas factors have been

intertwining with one another, thereby heightening the depreciation pressures on the

RMB exchange rate. First, expectations about Fed rate hikes have been reversed.

Despite weakened expectations of further Fed rate hikes at the beginning of 2023,

such expectations have started to rise again, supporting an appreciation of the U.S.

dollar. Second, political factors, such as the U.S. government debt ceiling and

geopolitical risks, have been driving up risk-aversion sentiments in global markets

and pushing up the U.S. dollar exchange rate. Third, domestic seasonal foreign

exchange purchasing demands have widened the foreign exchange supply-demand

gap. From June to August, companies listed on the Hong Kong Stock Exchange

(HKEX) should pay dividends to their shareholders, and most of such dividend

payout funding must be fulfilled through foreign exchange purchases. After the

COVID-19 pandemic, foreign exchange purchasing demands for cross-border travel

and overseas studies also increased significantly. On May 17, the offshore and

onshore RMB exchange rates (CNH and CNY) against the U.S. dollar consecutively

moved beyond 7.

The PBOC and the SAFE have paid great attention to foreign exchange development,

and they have mitigated the depreciation pressures on the RMB exchange rate in a

proactive yet prudent manner through measures such as strengthening expectation

management, regulating supply and demand in the foreign exchange market, and

raising the unified macro-prudential adjustment parameter for cross-border financing.

Overall, the current RMB exchange rate does not deviate from the fundamentals,

and the foreign exchange market is operating in a generally orderly manner. In

June, the surplus between the purchase and sale of foreign exchange in the banking

sector amounted to USD8.2 billion, significantly higher than the monthly average in

the previous months of this year. In H1 2023, the foreign exchange purchase ratio,

which measures the willingness for foreign exchange purchases, registered 67.5

percent, 0.5 percentage points higher than that in H1 2022, thus indicating rational

trading behavior in the foreign exchange market. In July, the RMB strengthened

against the U.S. dollar, with the closing rate on July 31 reaching 7.1465, an

appreciation of 1.6 percent from the end of June. Since the beginning of August, as

the USD index has gone up and the RMB has depreciated against the U.S. dollar.

However, the CFETS RMB exchange rate index, which measures the RMB exchange

rate against a basket of currencies, has strengthened, with a price of 97.47 on August

11 or an increase of nearly 2 percent from its recent trough.

The RMB exchange rate reflects price relations between the RMB and

other currencies, which are subject to a wide range of domestic and overseas

factors. The short-term exchange rate is full of uncertainties and difficult to

predict, whereas the long-term exchange rate is determined intrinsically by the

fundamentals of the Chinese economy. Currently, from the perspective of both

overseas and domestic factors, the RMB exchange rate will not move in the single

direction of depreciation; rather, it will float in both directions. In terms of overseas

factors, the rate hike cycle by the U.S. Fed is coming to an end, thus limiting

momentum for a significant rise in the U.S. dollar. From a domestic perspective, the

fundamentals for sound Chinese economic growth over the long run remain

unchanged. As smooth flows in the economy have been promoted, the continuous

overall improvement in China’s economic performance will support the RMB

exchange rate. In China, the current account surplus maintains at a moderate level of

roughly 2 percent of GDP and cross-border capital flows remain balanced

autonomously. China’s foreign exchange reserves balance remains steadily above

USD3 trillion and witnessed a month-on-month increase at the end of July, remaining

in first place in the world.

During the past few years, the RMB exchange rate moved beyond 7 against the U.S.

dollar on three occasions and later it strengthened to under 7. In the process of dealing

with multiple rounds of external shocks, the PBOC and the SAFE have

accumulated rich experience and have developed an ample reserve of policy tools,

hence they have the confidence, conditions, and capabilities to maintain steady

operations in the foreign exchange market. Going forward, the PBOC and the

SAFE will resolutely implement the decisions and arrangements made by the CPC

Central Committee and the State Council. With the aim of keeping the RMB exchange

rate basically stable at an adaptive and equilibrium level, the PBOC and the SAFE

will leverage the advantages of a managed floating exchange rate regime based on

market supply and demand with reference to a basket of currencies. They will also

pursue a holistic approach in terms of policy implementation and they will stabilize

expectations, making best use of various regulatory tools to regulate supply and

demand in foreign exchange markets and correcting pro-cyclical single-direction

market behavior so as to strongly forestall risks of exchange rate overshooting.

IX. Forestalling and defusing financial risks

Strengthening the monitoring and assessment of systemic risks. The PBOC

has continued to strengthen its monitoring and assessment of systemic financial risks,

and it has improved its framework for monitoring and assessment of financial stability.

It has also organized banking financial institutions to conduct stress tests and has

provided them with timely risk warnings, thus guiding financial institutions to operate

in a sound manner. The PBOC has conducted a Central Bank Rating on over

4,000 banking financial institutions on a regular basis and it has established a

differentiated management framework according to the rating results. For institutions

rated Grades 1-7, the PBOC has established an index system that includes

expansionary risks, inter-bank risks, liquidity risks, and credit risks, and it has

organized early warnings with the aim of preventing these institutions from

deteriorating into high-risk institutions. Meanwhile, the PBOC has also continued

to conduct risk monitoring in the securities sector, the insurance sector, and financial

markets through the use of financial market stress indexes to monitor risks in the

equity, bond, money, and foreign exchange markets.

Continuously advancing the forestalling and defusing of financial risks. The

PBOC remains committed to addressing risks in a market- and law-based manner and

it has properly resolved some prominent financial risks. For high-risk institutions

rated Grades 8-10 in the Central Bank Rating, the PBOC has distinguished previously

identified institutions from newly identified institutions in the process of addressing

related risks. The PBOC has proactively taken effective measures to reduce the

number of previously identified high-risk institutions. As for newly identified

institutions, the PBOC has established pilot programs to implement early corrections

with hard constraints and to defuse risks within a time limit of one year. These

measures have already had preliminary effects.

X. Improving the capability to serve cross-border trade, investment, and

financing

Promoting the coverage and quality of facilitation policies for quality enterprises.

The SAFE has put more effort into publicizing facilitation policies for quality

enterprises and it has supported more banks and enterprises with good credit,

excellent capabilities, as well as real demand to receive the benefits of the facilitation

policies. These actions have continuously expanded the coverage of the facilitation

policies for small- and medium-sized quality enterprises. In the first half of 2023,

facilitation-related transactions amounted to USD460 billion.

Deepening international monetary and financial cooperation. As of end-June

2023, under the bilateral currency swap agreements between the PBOC and the

overseas monetary authorities, the overseas monetary authorities had utilized a total of

RMB115.08 billion and the PBOC had utilized foreign currencies equivalent to

USD423 million. These operations have played an active role in promoting bilateral

trade and investment.

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

Foreign Exchange Spot Market in H1 2023

RMB100 million

Currency

USD

EUR

JPY

HKD

GBP

AUD

NZD

Trading

volume

329787.43

3945.74

2562.26

897.28

116.72

258.45

54.14

Currency

SGD

CHF

CAD

MYR

RUB

ZAR

KRW

Trading

volume

61.01

37.91

199.99

5.94

29.78

1.05

23.13

Currency

AED

SAR

HUF

PLN

DKK

SEK

NOK

Trading

volume

0.30

12.77

1.00

0.55

2.01

21.99

0.56

Currency

TRY

MXN

THB

KHR

KZT

MNT

IDR

Trading

volume

1.00

8.09

20.65

0.05

11.88

Source: China Foreign Exchange Trade System.

Part 3 Financial Market Conditions

In H1 2023, the performance of the financial market was generally stable. Money

market interest rates went down, with increasingly active market transactions. The

interest rates of treasury bond and financial bond issuances decreased, with an

increase in the volume of issuances and transaction. The stock market index picked up,

with turnover and the amount of funds raised decreasing year on year.

I. Financial market overview

1. Money market interest rates went down with increasingly active market

transactions

In June 2023, the monthly weighted average interest rate for interbank lending was

1.57 percent, and the monthly weighted average interest rate for pledged repos posted

1.67 percent, 13 basis points and 18 basis points lower than those in March 2023,

respectively. The monthly weighted average interest rate for government-backed bond

pledged repos among depository institutions posted 1.47 percent, 20 basis points

lower than the monthly weighted average interest rate for pledged repos. At end-June,

the overnight and 7-day Shibor posted 1.48 percent and 2.06 percent, respectively,

down 47 basis points and 16 basis points from end-December 2022, respectively.

The level of market transaction activity increased. In H1 2023, the cumulative volume

of bond repos trading on the interbank market registered RMB796.4 trillion,

representing an average daily turnover of RMB6.5 trillion and an increase of 25.4

percent year on year. The YOY growth rate was 4.8 percentage points higher than that

in Q1 2023. The cumulative volume of trading for interbank lending registered

RMB74.1 trillion, representing an average daily turnover of RMB602.4 billion and an

increase of 9.2 percent year on year. In terms of the maturity structure, overnight

repos accounted for 86.8 percent of the total turnover in bond repos, up 1.2 percentage

points year on year, and overnight lending constituted 90.3 percent of the total

turnover in interbank lending, up 2.0 percentage points year on year. In H1 2023, the

volume of bond repos trading on the exchange markets increased 16.8 percent year on

year to RMB225.2 trillion.

Table 9 Fund Flows Among Financial Institutions in H1 2023

Unit: RMB100 million

Repos

Interbank lending

H1 2023

H1 2022

H1 2023

H1 2022

Chinese-funded large banks

①

-3,447,118

-2,010,169

-261,347

-197,651

Chinese-funded medium-

sized banks

②

-613,901

-819,288

-46,373

-78,357

Chinese-funded small-

sized banks

③

261,586

1,363

53,756

38,862

Securities institutions

④

1,033,712

811,036

213,447

185,566

Insurance institutions

⑤

103,462

94,317

571

604

Foreign-funded banks

30,671

39,356

-8,916

-6,167

Other financial institutions and

vehicles

⑥

2,631,587

1,883,386

48,863

57,141

Notes ： ① Chinese-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. ② Chinese-funded medium-

sized banks refer to policy banks, China Merchants Bank, and eight other joint-

equity commercial banks, Bank of Beijing, Bank of Shanghai, and Bank of Jiangsu. ③Chinese-

funded small-sized banks refer to the 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. ④ Securities institutions include securities firms, fund

management companies, and futures companies. ⑤Insurance institutions include insurance firms

and corporate annuities. ⑥ Other 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 Deposits (CDs) and negotiable CD businesses operated

orderly. In H1 2023, about 14,000 interbank CDs were issued on the interbank market,

raising RMB12.8 trillion. The total volume of trading on the secondary market

registered RMB130.1 trillion. At end-June, outstanding interbank CDs reached

RMB14.4 trillion. The weighted average interest rate of 3-month interbank CDs was

2.39 percent, 4 basis points higher than that of the 3-month Shibor. In H1, about

38,000 negotiable CDs were issued by financial institutions, raising RMB8.6 trillion

and increasing by RMB1.1 trillion year on year.

Interest rate swap transactions remained stable. In H1 2023, the RMB interest rate

swap market witnessed 167,000 transactions, increasing 37.1 percent year on year,

with the volume of the notional principal totaling RMB15.1 trillion, an increase

of 78.9 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 RMB10.4 trillion, accounting for 69.0 percent of the principal of all

maturities. The 7-day fixing repo rate (FR) and the Shibor served as the main

reference rates for the floating leg of the RMB interest rate swaps, accounting for 90.4

percent and 8.3 percent, respectively, of the total notional principal of the interest rate

swaps. In H1, interest rate swaps anchored to the loan prime rate (LPR) witnessed 778

transactions, with RMB133.41 billion of the notional principal.

Table 10 Interest Rate Swap Transactions in H1 2023

Transactions

Notional principal (RMB100 million)

H1 2023

167,162

151,031.9

H1 2022

105,227

84,433.6

Source: China Foreign Exchange Trade System.

The interest rate options business developed at a steady pace. In H1 2023, a total of

697 interest rate options transactions were concluded, totaling RMB111.60 billion.

Specifically, 6 were interest rate swap transactions, amounting to RMB2.0 billion of

the notional principal, and 691 were interest rate cap/floor transactions, amounting to

RMB109.60 billion of the notional principal.

2. The coupon rates of bonds went down, while bond issuances and trading

increased

The coupon rates of government securities and financial bonds fell. In June 2023, the

yield on 10-year government securities issued by the Ministry of Finance was 2.65

percent, 18 basis points lower than the rate in March. The coupon rate of 10-year

financial bonds issued by the China Development Bank (CDB) was 2.75 percent,

24 basis points lower than the rate in March. The average rate of 1-year short-term

financing bills (bond rating A-1) issued by AAA-rated enterprises was 3.47 percent,

18 basis points lower than the rate in March.

Figure 4 Yield Curves of Government Securities in the Interbank Market

Source: China Central Depository & Clearing Co., Ltd.

On the whole, the yield on government securities edged downward in H1 with slightly

expanded term spreads. At end-June 2023, yields on 1-year, 3-year, 5-year, 7-year, and

10-year government securities decreased by 22 basis points, 18 basis points, 22 basis

points, 19 basis points, and 20 basis points, to 1.87 percent, 2.23 percent, 2.42 percent,

2.63 percent, and 2.64 percent from end-2022, respectively. The term spread between

1-year and 10-year government securities was 76 basis points, increasing 2 basis

points from end-2022.

Bond issuances increased year on year. The cumulative value of bonds issued in H1

grew by 9 percent year on year to RMB34.3 trillion, RMB2.8 trillion more than that in

the same period of last year mainly due to the large increase in government securities

and interbank certificates of deposits. At end-June, outstanding bonds held in custody

amounted to RMB150.3 trillion, representing an increase of 6.1 percent year on year.

Since the expansion of the "second arrow" in November 2022, a supporting

instrument to stabilize and promote bond financing by private enterprises, bond

issuances by private enterprises has reached a cumulative RMB28.4 billion.

The trading volume of spot bonds grew. In H1, the value of cash bonds traded on

the bond market posted RMB163.0 trillion, registering an increase of 13.1 percent

year on year. Specifically, the value of cash bonds traded on the interbank market was

RMB143.7 trillion, representing an increase of 15.6 percent year on year. The value

of cash bond transactions on the stock exchanges totaled RMB19.2 trillion, a decrease

of 2.5 percent year on year.

Table 11 Bond Issuances in H1 2023

Unit: RMB100 million

Type of bond

Issuance

YOY change

Government securities

44,846

10,471

Local government bonds

42,033

-10,469

Central bank bills

Financial bonds①

184,218

26,709

Of which: Financial bonds issued by the

CDB and policy financial bonds

35,619

7,157

Interbank certificates

of deposits

128,107

19,449

Corporate credit bonds②

71,471

1,317

Of which: Debt-financing instruments of

non-financial enterprises

45,448

-2,995

Enterprise bonds

2,347

-830

Corporate bonds

18,057

4,569

Bonds issued by international institutions

709

198

Total

343,278

28,227

Notes: ① Including financial bonds issued by the CDB, 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. ②Including

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(CSRC), and

China Central Depository & Clearing Co., Ltd. Updated with the latest data from the providers.

3. The bill acceptance business fell back, and bill financing business was

generally stable with a slight shrinkage

The bill acceptance business declined. In H1 2023, commercial drafts issued by

enterprises totaled RMB12.4 trillion, falling 11.7 percent year on year. At end-June,

outstanding commercial drafts stood at RMB16.3 trillion, decreasing by 2.2 percent

year on year. Outstanding commercial draft acceptances decreased. At end-June,

outstanding commercial draft acceptances dropped by RMB403.3 billion from the end

of March. Of the outstanding bankers’ acceptances, 67.7 percent were issued by micro,

small, and medium-sized enterprises (MSMEs). Supply chain bill business has been

implemented. In H1, discount financing by enterprises amounted to RMB12.8 billion,

effectively playing the role of bill business in serving the real economy.

Bill financing was generally stable, with a slight decline. In H1, total discounts by

financial institutions amounted to RMB25.6 trillion, falling 11.3 percent year on year.

At end-June, the balance of bill financing was RMB11.9 trillion, down 0.4 percent

year on year. The balance accounted for 5.2 percent of the total outstanding loans,

down 0.6 percentage points year on year. In Q2, the interest rates for bill financing

went down.

4. The stock indices grew, with turnover and the amount of funds raised on the

stock markets decreasing year on year

The stock indices witnessed a choppy rise. At the beginning of 2023, with the smooth

transition of pandemic containment and the recovery of the economy, the stock

market rebounded quickly, with both the Shanghai Stock Exchange Composite Index

and the Shenzhen Stock Exchange Component Index. After March, the overall

trend became volatile. At end-June, the Shanghai Stock Exchange Composite

Index closed at 3,202 points, increasing by 3.7 percent from end-2022. The Shenzhen

Stock Exchange Component Index closed at 11,027 points, increasing by 0.1 percent

from end-2022. The turnover and the amount of funds raised on the stock markets

declined year on year. In H1, the combined turnover on the Shanghai Stock Exchange

and the Shenzhen Stock Exchange reached RMB111.5 trillion, and the average daily

turnover was RMB944.6 billion, representing a decrease of 3.4 percent year on year.

In H1, cumulative funds in the amount of RMB512 billion were raised, decreasing by

9.8 percent year on year.

5. Premium income increased year on year and the growth of assets accelerated

In H1 2023, total premium income in the insurance sector amounted to RMB3.2

trillion, up 12.5 percent year on year, an acceleration of 8 percentage points compared

to that recorded in 2022. Claim and benefit payments totaled RMB915.1 billion,

representing a year-on-year increase of 17.8 percent. Specifically, total property

insurance claims and benefit payments increased by 17.1 percent year on year and

total life insurance claims and benefit payments increased by 18.3 percent year on

year.

Table 12 Asset Allocations in the Insurance Sector at End-June 2023

Units: RMB100 million, %

Balance

As a share of total assets

End-June 2023

End-June 2022

End-June 2023

End-June 2022

Total assets

291,998

266,385

100.0

of which: Bank deposits

28,967

28,603

9.9

10.7

Investments

239,255

215,992

81.9

81.1

Source: National Administration of Financial Regulation.

The growth of assets in the insurance sector accelerated. At end-June 2023, total

assets in the insurance sector increased 9.6 percent year on year to RMB29.2 trillion,

an acceleration of 0.5 percentage points from end-2022. Specifically, bank deposits

increased by 1.3 percent, while investment-linked assets increased by 10.8 percent

year on year.

6. The turnover of spot foreign exchange transactions increased while that of

forward transactions declined year on year

In H1 2023, the cumulative turnover of spot RMB/foreign exchange transactions

registered USD4.9 trillion, an increase of 27.5 percent year on year. The cumulative

turnover of swap RMB/foreign exchange transactions totaled USD9.8 trillion, a

decrease of 0.5 percent year on year. Specifically, cumulative overnight RMB/USD

swap transactions posted USD6.4 trillion, accounting for 65.6 percent of the total

swap turnover. The turnover of RMB/foreign exchange forward transactions totaled

USD48.4 billion, decreasing 28.3 percent year on year. The turnover of

foreign currency pair transactions totaled USD823.3 billion, increasing by 19.1

percent year on year. In particular, the EUR/USD pair registered the largest trading

volume, accounting for 39.4 percent of the total market share.

7. The volume of gold trading expanded year on year, while gold prices went up

At end-June 2023, international gold prices closed at USD1,912.3 per ounce,

representing an increase of 5.5 percent from end-2022. The Au99.99 on the Shanghai

Gold Exchange closed at RMB448.5 per gram, increasing by 9.3 percent from end-

2022. In Q2 2023, the volume of gold traded on the Shanghai Gold Exchange was

10,000 tons, an increase of 0.5 percent year on year. The turnover posted RMB4.4

trillion, up 12.6 percent year on year.

II. The development of institutional arrangements in financial markets

1. Institutional arrangements in the bond market

The business of bond valuation in the interbank bond market was regulated. In June

2023, the PBOC released the Measures for the Administration of Bond Valuation

Business in the Interbank Bond Market (Exposure Draft) for public comments. The

Measures specifies requirements for valuation institutions, with respect to their

internal governance, information disclosures and conflict of interest, as well as the

general principles and methodologies for valuations. It aimed to make bond valuation

more neutral, impartial, professional and transparent, to enhance the effectiveness of

market pricing and market functions, and to prevent market risks.

The opening-up of the bond market at a high level will be steadily promoted. Under

the guidance of PBOC, relevant financial infrastructure institutions implemented a

package of measures to facilitate investment. First, foreign-funded institutions in

China were included in the market makers for the Northbound Bond Connect. With

the strong advantages of foreign market makers in regional overseas client resources

and in cross-border service capabilities, the capability of serving overseas investors

were improved. Second, the function of trading a basket of bond portfolio became

available. It better met the needs of index investors, reduced the cost of inquiry when

multiple bonds were transferred, and improved trading efficiency. Third, the reporting

procedure for settlement failures in the Northbound Bond Connect was improved.

After upgrading the infrastructure system, we enabled online one-stop reporting, thus

greatly improving the convenience of investments. Fourth, connectivity

and cooperation were enhanced between the interest rate swap markets of the

mainland and Hong Kong. With connected infrastructures, overseas investors can

enjoy a greater convenience in interest rate risk management.

2. Reform and institutional arrangements in the securities market

The legal system for the capital market was improved. In April 2023, the CSRC

released the Work Plan for Promoting the High-quality Development of Bonds of

Scientific and Technological Innovation Companies, covering such aspects as

upgrading financing services, enhancing fund supply for sci-tech innovation,

improving the liquidity of sci-tech innovation bonds, and optimizing the evaluation

and assessment mechanism. The Work Plan aimed to establish a full-life-cycle bond

financing support system for sci-tech innovation enterprises, improve the quality and

efficiency of serving sci-tech innovation enterprises at a faster pace, and promote a

virtuous cycle of science and technology, industry, and finance. On June 16, the State

Council, at its 8th Executive Meeting, deliberated and passed the Regulation on the

Supervision and Administration of Private Investment Funds (Draft), which was

officially released by the CSRC on July 9 and came into force on September 1. The

Regulation clarified regulatory requirements for key entities, standardize the

requirements for fund raising and filing, regulate investment business activities and

market-based exit mechanisms, enrich the means of supervision during and after the

event, bring all types of private equity funds under the rule of law and standardization,

and further give play to the role of private equity investment funds in serving the real

economy and promoting sci-tech innovation.

The two-way opening-up of the capital market was boosted. On May 16, the CSRC

released the Guidelines for the Application of Regulatory Rules – Overseas Offerings

and Listings No. 6: Guidelines for the Overseas Offering of Global Depository

Receipts by Domestic Listed Companies. The Guidelines regulate the behavior of

domestic listed companies issuing depository receipts that can be converted into

domestic underlying shares and support domestic listed companies to make good use

of two markets and two resources to meet their needs to develop overseas businesses.

3. Institutional arrangements in the insurance market

The actuarial system for agricultural insurance was improved. In April 2023, the

former China Insurance and Banking Commission (CBIRC) released the Actuarial

Provisions for Agricultural Insurance (Trial). The Provisions clarify the actuarial

rules for agricultural insurance, covering the rate structure, rate backdating, and

assessment of the premium deficiency reserve. By specifying the use of benchmark

pure risk loss rates, additional rates, and a rate adjustment coefficient, the Provisions

enable management of the floating prices centering on risks for agricultural insurance.

The floating range of the rate adjustment coefficient of financial subsidy products is

limited to [0.75,1.25], and that of other products is limited to [0.5,1.5], so as to

facilitate the stable and sustainable development of agricultural insurance. At the same

time, the Provisions also clarifies the responsibilities of the chief actuary of the

insurance company and the corresponding regulatory measures.

Part 4 Macroeconomic Overview

I. Global economic and financial developments

Recovery continued in the major economies, and inflation fell further in Europe and

the U.S.. The labor market cooled marginally, but remains tight. It will take some

time before inflation falls back to pre-pandemic levels. The advanced economies

may be close to the end of this tightening cycle, and the global financial markets

strengthened. However, the potential risks of rising uncertainties in monetary policy,

persistently tighter global financial conditions, and escalating geopolitical tensions

still merit attention.

1. Economic performance and financial markets in the major economies

Economic recovery continued. In the second quarter (Q2), real gross domestic

product (GDP) increased at an annual rate of 2.4 percent in the U.S., slightly higher

than the 2 percent in the first quarter (Q1), but still lower than the 2.6 percent in the

fourth quarter (Q4) of last year. In June, the manufacturing Purchasing Managers’

Index (PMI) was 46, staying below 50 for eight straight months. The GDP in the euro

area grew by 0.6 percent year on year in Q2, slower than the 1.1 percent growth in Q1

and the 1.7 percent growth in Q4 of last year. The manufacturing PMI posted 43.4 in

June, a reading that has been under 50 for 12 months in a row. In Japan, the GDP

gained 2.0 percent year on year in Q2, the same as that in Q1, and the total output still

has not returned to pre-pandemic levels.

Inflation has come down further in the U.S. and Europe. In June, the U.S.

Consumer Price Index (CPI) was up by 3.0 percent year on year, falling for 12 months

in a row, and the core CPI has eased from 5.6 percent in March to 4.8 percent. The

Harmonized Index of Consumer Prices (HICP) in the euro area rose by 5.5 percent

over the prior year, far below the 6.9 percent in March, but the core HICP rebounded

slightly compared with the increase in May and reached 5.5 percent. The CPI in the

UK was up by 7.9 percent in June, a sharp decline from the over 10 percent increase

in Q1, but remained at historic highs.

The labor market remained tight. From April to June, the U.S. jobless rate

stayed between the record lows of 3.4 percent and 3.7 percent, indicating that the

labor market is still hot. In June, nonfarm payrolls increased by 185 thousand, below

the May’s gain of 281 thousand. Job vacancies dropped from 10.32 million in April to

9.58 million, slightly below market expectation. The labor force participation rate has

stayed at 62.6 percent for four consecutive months, still lower than the pre-pandemic

average. The year-on-year growth of hourly wage for nonfarm workers moderated,

hovering around 4.4 percent.

Global financial markets strengthened. The U.S. and European equity markets

witnessed higher volatility after the collapse of some banks in March, and

strengthened as market sentiments improved. In the first half of this year, the S&P 500

and EURO STOXX 50 increased by 15.9 percent and 16.0 percent, respectively, while

the Nikkei 225 surged by 27.2 percent, making a new record high since 1990. The

entrenched core inflation has cooled market expectations for a near-term pivot to

easing in the major economies, and the bond yields went up. As of end-June, the yield

on 10-year and 2-year U.S. Treasuries was 3.81 percent and 4.87 percent, respectively,

up by 33 basis points (bps) and 81 bps compared with end-March. The U.S. dollar

index fluctuated slightly above 100, rising by 0.8 percent from the end of March. The

euro and British pound strengthened, appreciating by 0.7 percent and 3.0 percent

against the U.S. dollar in Q2.

Table 13 Macroeconomic and Financial Indicators in the Major Advanced

Economies

Sources: Statistical Bureaus and Central Banks of the Relevant Economies.

2. Monetary policies of the major economies

The central banks in the major advanced economies continued with monetary

tightening, but at a slower pace. The Federal Reserve (Fed) raised rates in May by

Economy

Indicator

Q2 2022

Q3 2022

Q4 2022

Q1 2023

Q2 2023

Apr.

May

Jun.

Jul.

Aug.

Sept.

Oct.

Nov.

Dec.

Jan.

Feb.

Mar.

Apr.

May

Jun.

United States

Real GDP

Growth

(annualized

quarterly rate, %)

-0.6

3.2

2.6

2.0

2.4

Unemployment

Rate (%)

3.6

3.5

3.7

3.5

3.7

3.6

3.5

3.4

3.6

3.5

3.4

3.7

3.6

CPI (year-on-

year, %)

8.3

8.6

9.1

8.5

8.3

8.2

7.7

7.1

6.5

6.4

6.0

5.0

4.9

4.0

3.0

DJ Industrial

Average (end of

the period)

32977

32990

30775

32845

31510

28726

32733

34590

33147

34086

32657

33274

34098

32908

34408

Euro Area

Real GDP

Growth (year-on-

year, %)

4.2

2.4

1.7

1.1

0.6

Unemployment

Rate (%)

6.7

6.6

6.5

6.4

HICP (year-on-

year, %)

7.4

8.1

8.6

8.9

9.1

9.9

10.6

10.1

9.2

8.6

8.5

6.9

7.0

6.1

5.5

EURO

STOXX 50 (end

of the period)

3803

3789

3455

3683

3517

3318

3618

3936

3794

4165

4246

4376

4359

4218

4399

United Kingdom

Real GDP

Growth (year-on

year, %)

3.8

2.0

0.6

0.2

…

Unemployment

Rate (%)

3.8

3.6

3.5

3.6

3.7

3.8

3.9

3.8

4.0

…

CPI (year-on-

year, %)

9.0

9.1

9.4

10.1

9.9

10.1

11.1

10.7

10.5

10.1

10.4

10.1

8.7

7.9

FTSE 100 (end

of the period)

7545

7608

7169

7423

7284

6894

7095

7573

7452

7772

7876

7632

7871

7446

7532

Japan

Real GDP

Growth

(annualized

quarterly rate, %)

5.1

-1.2

0.2

3.7

6.0

Unemployment

Rate (%)

2.5

2.6

2.5

2.6

2.5

2.4

2.6

2.8

2.6

2.5

CPI (year-on-

year, %)

2.5

2.4

2.6

3.0

3.7

3.8

4.0

4.3

3.3

3.2

3.5

3.2

3.3

Nikkei 225 (end

of the period)

26848

27280

26393

27802

28092

25937

27587

27969

26095

27327

27446

28041

28856

30888

33189

25 bps, paused in June, and hiked again by 25 bps in July. The federal funds rate is

now at a target range of 5.25-5.5 percent. Fed Chair Jerome Powell said the Fed

would take a data-dependent approach in determining the extent to which additional

policy firming may be appropriate. In the meantime, the Fed continued to shrink

its balance sheet as planned. The European Central Bank (ECB) increased interest

rates in May, June, and July each by 25 bps, bringing the interest rate on its main

refinancing operations, marginal lending facility, and deposit facility to 4.25 percent,

4.5 percent, and 3.75 percent, respectively. The ECB started to shrink its balance sheet

from early March by a monthly average amount of EUR15 billion until the end of

June. In July, it ended the reinvestment of the principal payments from maturing

securities under the Asset Purchase Program (APP). The Bank of England raised

rates by 25 bps, 50 bps, and 25 bps in May, June, and August, respectively. Now, the

Bank Rate is 5.25 percent. The Bank of Japan (BOJ) kept its short-term policy rate

unchanged at -0.1 percent, and continued to allow 10-year Japanese government bond

yields to fluctuate in the range of around plus and minus 0.5 percentage points from

its 0 percent target level. In July, the BOJ decided to conduct yield curve control with

greater flexibility, regarding the upper and lower bounds of the range as references,

not as rigid limits, in its market operations, and will offer to purchase 10-year

Japanese government bonds at 1.0 percent every business day through fixed-rate

purchase operations. The Reserve Bank of Australia paused rate hikes in April, and

raised rates in May and June by 50 bps cumulatively. The Bank of Canada raised

rates by 25 bps in June after a pause in March and April. The Bank of Korea kept

rates unchanged in Q2.

Monetary policies in emerging economies diverged. Some emerging

economies continued to raise rates. In Q2, the central banks in Argentina, Turkey,

South Africa, and Malaysia hiked rates by 1900 bps, 650 bps, 50 bps, and 25 bps,

respectively, whereas those in India, Russia, Brazil, Mexico, and Indonesia stood pat

on rates.

3. Issues and trends that merit attention

It takes more time for inflation to return to pre-pandemic levels. Inflationary

pressures in the U.S. and Europe have eased, but prices fall relatively slowly. In June,

the U.S. CPI fell to 3 percent mainly due to high base effects. The core inflation in the

euro area proved quite sticky, as the core HICP hovered around 5.3-5.7 percent in the

first six months of this year. The labor markets in the U.S. and Europe remain tight,

and the unemployment rates are at record lows, which has supported rapid wage

growth. Going forward, the journey to bring down inflation is likely to be tortuous.

Financial stability risks have increased. This year, the banking crisis in the U.S. and

Europe, coupled with the risk of the U.S. government defaulting on its debt, has

shocked global financial markets. The collapse of three U.S. regional banks and

the crisis of the Credit Suisse have highlighted the challenges of tighter monetary and

financial conditions. Despite timely and strong responses from the U.S. and European

regulators to the banking crisis, and temporary solutions to the U.S. government

debt ceiling, uncertainties and risk aversion remain in global financial markets. The

revaluation of financial assets is still going on. The risk of tighter liquidity globally

may have further spillovers to emerging market economies.

Economic outlook and monetary policy have become more uncertain. Some

new complexities have emerged in the economic performance of the major economies

since the beginning of this tightening cycle. Inflation falls slowly, while the labor

market remains tight. Central banks would be happy to see economic and labor

market resilience, but whether inflation will fall steadily is yet to be seen. A number

of central banks, such as the Fed, the Bank of Canada, and the Reserve Bank of

Australia all resumed rate hikes after a pause.

II. Macroeconomic developments in China

In H1, faced with the complex and severe international environment and the arduous

tasks of domestic reform, development, and stability, all regions and departments

earnestly implemented the strategic arrangements of the CPC Central Committee and

the State Council and made coordinated efforts to put forth macro policies, placing an

emphasis on stabilizing growth, employment, and prices. The national economy

witnessed a continuous recovery and steadily turned toward high-quality development.

Industrial upgrading underwent long-term accumulation, food and energy security

were guaranteed effectively, and overall social stability remained. According to

preliminary statistics, GDP in H1 grew by 5.5 percent year on year to RMB59.3034

trillion on a comparable basis. Specifically, GDP in Q2 grew by 6.3 percent year on

year, an acceleration of 1.8 percentage points from Q1, thus laying a solid foundation

for achieving the annual growth target.

1. Consumption recovered steadily, investments grew stably, and imports and

exports maintained their growth

Residents’ income grew steadily and consumption potential was gradually released. In

H1, China’s per capita disposable income reached RMB19672, increasing by 6.5

percent year on year in nominal terms, or 5.8 percent in real terms, an acceleration of

1.4 percentage points and 2.0 percentage points from Q1, respectively. The

structure of income distribution continuously improved. The nominal and real growth

rates of rural residents’ income were 2.4 percentage points and 2.5 percentage points,

respectively, which were higher than those of urban residents. In H1, total retail sales

of consumer goods grew by 8.2 percent year on year, an acceleration of 2.4

percentage points from Q1. Consumption of basic living items saw stable growth,

with retail sales of enterprises (units) above the designated size in terms of textile

products, such as clothing, shoes, and hats, increasing by 12.8 percent and those in

terms of grain, oil, and food increasing by 4.8 percent year on year. Sales of upgraded

products increased fairly rapidly, with retail sales of gold/silver/jewelry,

sports/entertainment products and cosmetics by enterprises (units) above the

designated size increasing by 17.5 percent, 10.5 percent, and 8.6 percent, respectively.

The recovery of service consumption accelerated, with domestic tourism revenue

increasing by 95.9 percent year on year in H1. Institutions predicted that the heat of

the summer tourism market this year would be higher than that over the same period

for the past five years. According to the Urban Depositors’ Survey conducted by the

PBOC in Q2, 24.5 percent of residents were inclined to

“

consume more,

”

up 1.2

percentage points from Q1.

Investments grew continuously and investments in the high-tech industry expanded

rapidly. In H1, total fixed-asset investments throughout China (excluding those by

rural households) increased by 3.8 percent year on year to RMB24.3113 trillion. In

terms of sectors, investments in the manufacturing sector increased by 6.0 percent, 2.2

percentage points higher than the growth of total investments. Investments in

infrastructure increased by 7.2 percent, 3.4 percentage points higher than the growth

of total investments. Investments in real estate development decreased by 7.9 percent

year on year. Investments in the high-tech industry grew by 12.5 percent year on year.

Specifically, investments in the high-tech manufacturing industry and high-tech

services industry grew by 11.8 percent and 13.9 percent, respectively. In the high-tech

manufacturing industry, investments in the medical equipment/instrument

manufacturing industry, and electronic and communication equipment manufacturing

industry, increased by 16.8 percent and 14.2 percent, respectively, year on year. In the

high-tech services industry, investments in professional technical service industry and

science and technology achievements transformation service industry

increased by 51.6 percent and 46.3 percent, year on year, respectively.

Imports and exports maintained growth, with the trade structure continuously

improved. In H1, imports and exports of goods grew by 2.1 percent year on year to

RMB20.1016 trillion. Specifically, exports grew by 3.7 percent year on year and

imports fell by 0.1 percent year on year, with the trade surplus in goods posting

RMB2.8159 trillion. The trade structure continued to improve. The share of imports

and exports under general trade increased by 4.0 percent and accounted for 65.5

percent of total imports and exports, increasing by 1.2 percentage points year on year.

Imports and exports of private enterprises increased by 8.9 percent, accounting

for 52.7 percent of total imports and exports, increasing by 3.3 percentage points year

on year. China’s imports and exports with its trading partners continued to rise, with

imports and exports to countries along the Belt and Road growing by 9.8 percent year

on year.

Foreign direct investment (FDI) was basically stable and the quality of

investments continued to improve. In H1, actually utilized FDI decreased by 2.7

percent year on year to RMB703.65 billion. The quality of investments continued to

improve. Actually utilized FDI in the high-tech industries grew by 7.9 percent year on

year, and that in the high-tech manufacturing industry increased by 28.8 percent year

on year. The policies of an economy with a new height of openness has a significant

driving effect, with 21 pilot free trade zones absorbing foreign investment

increasing by 8.2 percent year on year to RMB129.66 billion.

2. Agricultural production was generally stable, industrial production recovered

steadily, and the service industry grew rapidly

In H1, the value-added of the primary industry totaled RMB3.0416 trillion, up 3.7

percent year on year. The value-added of the secondary industry totaled RMB23.0682

trillion, up 4.3 percent year on year. The value-added of the tertiary industry totaled

RMB33.1937 trillion, up 6.4 percent year on year.

Agricultural production was stable, and animal husbandry grew steadily. The output

of summer grain saw another bumper harvest, with output achieving a second historic

high. In H1, the output of pork, beef, lamb, and poultry grew by 3.6 percent year on

year, and the output of pork specifically grew by 3.2 percent year on year. At end-

June, the number of hogs in stock and the number of hogs for slaughter increased by

1.1 percent and 2.6 percent year on year, respectively.

Industrial production recovered steadily and the equipment manufacturing industry

grew rapidly. In H1, the value-added of Industrial Enterprises Above a Designated

Size (IEDS) increased by 3.8 percent year on year, an acceleration of 0.8 percentage

points from Q1. Specifically, the value-added of the mining sector and of the

manufacturing sector increased by 1.7 percent and 4.2 percent year on year,

respectively. The electricity, heat, gas, and water production and supply sector

increased by 4.1 percent year on year. In terms of enterprise types, the value-added of

state-owned holding enterprises increased by 4.4 percent year on year and that

of corporate enterprises increased by 4.4 percent year on year. In terms of products,

the output of solar cells and new energy vehicles grew by 54.5 percent and 35.0

percent year on year, respectively. In June, the total profits of the IEDS decreased by

8.3 percent year on year, a deceleration of 10.9 percentage points from March.

The service industry grew rapidly, with significant improvements in the contact

service industry. In H1, the value-added of the service industry grew by 6.4 percent

year on year, an acceleration of 1.0 percentage point from Q1. Specifically, the value-

added of accommodations and catering, electronic information

transmission/software/information technology services, and the leasing/business

services sectors grew by 15.5 percent, 12.9 percent, and 10.1 percent year on year,

respectively. In June, the Index of Service Production (ISP) increased by 6.8 percent

year on year, and the cumulative growth in H1 accelerated by 2 percentage points

from Q1. Specifically, the ISP of accommodations and catering, electronic

information transmission/software/information technology services, and the

leasing/business services in June increased by 20.0 percent, 15.4 percent, and 9.3

percent year on year, respectively. The Business Activities Index for the services

industry reached 52.8 percent in June. The revenue of enterprises above a designated

size in the service industry increased by 8.5 percent from January to May, accelerating

for three consecutive months.

3. Consumer prices remained at a low level, but the core CPI increased year on

year.

Consumer prices remained at a low level. In H1, the CPI increased by 0.7 percent year

on year, a deceleration of 0.6 percentage points from Q1. The CPI in April, May, and

June increased by 0.1 percent, 0.2 percent, and 0.0 percent, respectively. Specifically,

sufficient supply and weak demand led to a decline in prices of many fresh food

products, and the price of pork stayed on a downward trend even as the decrease

expanded. Compounded by the base effect, the year-on-year growth in food prices

decreased by 1.2 percentage points from Q1. Service prices continued their recovery

growth, but there was an expanded decrease in prices of industrial consumer goods

such as fuel, transportation and communication equipment, and household appliances.

The year-on-year growth in non-food prices decreased by 0.4 percentage points year

on year. The year-on-year growth in core CPI (food and energy excluded) posted 0.7

percent, remaining within positive territory.

The year-on-year growth of producer prices continued to decelerate. Affected by the

decline in energy prices, such as oil and coal, the high base effect, and weak demand

in the real estate industry, the prices of products in downstream related

industries continued to decrease. In H1, the Producer Price Index (PPI) decreased by

3.1 percent year on year, a deceleration of 1.5 percentage points from Q1. The

decrease of PPI in April, May and June was 3.6 percent, 4.6 percent and 5.4 percent,

respectively. In July, the PPI rebounded, with the year-on-year decrease narrowing by

4.4 percent. In H1, the Purchasing Price Index for Industrial Products (PPIRM)

decreased 3.0 percent year on year, a deceleration of 2.2 percentage points from Q1.

The Corporate Goods Price Index (CGPI) monitored by the PBOC decreased by 2.2

percent year on year, a deceleration of 1.6 percentage points from Q1 and 8.0

percentage points from H1 of 2022.

4. Fiscal revenue rose steadily and expenditures grew slightly.

In H1, revenue in the national general public budget posted RMB11.9 trillion,

increasing 13.3 percent year on year. Specifically, central and local fiscal revenue

increased by 13.1 percent and 13.5 percent, respectively. National tax revenue

amounted to RMB9.9661 trillion, increasing 16.5 percent year on year. Specifically,

the domestic value-added tax increased by 96.0 percent year on year.

The consumption tax, the corporate income tax, and the personal income tax

decreased by 13.4 percent, 5.4 percent, and 0.6 percent year on year, respectively.

Non-tax revenue posted RMB1.9542 trillion, decreasing by 0.6 percent year on year.

In H1, expenditures in the national general public budget posted RMB13.4 trillion,

increasing by 3.9 percent year on year. Specifically, expenditures in the central level

general public budget and the local level general public budget increased by 6.6

percent and 3.5 percent year on year, respectively. In terms of the expenditure

structure, expenditures related to housing, social security and employment, and health

grew rapidly, witnessing a year-on-year increase of 8.5 percent, 7.9 percent, and 6.9

percent, respectively.

5. The employment situation remained generally stable

The surveyed urban unemployment rate continued to decline. In H1, 6.78 million

people were newly employed in urban areas, and the surveyed urban unemployment

rate averaged 5.3 percent, 0.2 percentage points lower than that in Q1. In June, the

surveyed urban unemployment rate posted 5.2 percent, on par with the previous

month. Specifically, the surveyed unemployment rate for the population between the

ages of 25 and 59 posted 4.1 percent, 1.1 percentage points lower than the national

surveyed urban unemployment rate. Due to the regular impact of the summer

graduation season, the unemployment rate for the population between the ages of 16

and 24 posted 21.3 percent in June, increasing by 0.5 percentage point from last

month, lower than the average over the same period in the past five years.

6. The balance of payments and the external debt

According to preliminary statistics, China’s current account surplus registered

USD146.8 billion in H1, accounting for 1.7 percent of the Gross Domestic Product

(GDP) and remaining within a reasonable range. Specifically, according to

the balance of payments statistics, trade in goods recorded a surplus of

USD293.3 billion, ranking as the second highest over the same period of the previous

years. Trade in services recorded a deficit of USD102.1 billion, gradually returning to

normal. Cross-border capital flow under the capital and financial account generally

remained stable. Specifically, the net outflow of overseas equity investment posted

USD55.9 billion and net inflow of foreign equity investment in China posted

USD32.3 billion. Foreign capital inflow into the domestic share market increased

significantly, and the bond market resumed its trend of net inflow. By end-June 2023,

foreign reserves stood at USD3.193 trillion, an increase of USD65.3 billion compared

with those at end-2022. This was mainly due to the influence of factors such

as currency conversions and changes in asset prices. Regarding the external debt, at

end-March the balance of full-caliber foreign debt (denominated in both domestic and

foreign currencies) posted USD2.4909 trillion. Specifically, the short-term external

debt balance posted USD1.3997 trillion, accounting for 56 percent of the total

external debt balance.

7. Analysis by sector

7.1 The real estate sector

In June, among 70 medium and large-sized cities nationwide, newly built and second-

hand residential housing prices decreased by 0.4 percent and 2.8 percent year on year,

down 1 percentage point and 0.1 percentage points from March, respectively. In H1,

the total floor area of sold commercial housing decreased by 5.3 percent year on year.

Housing sales increased by 1.1 percent year on year. Investments in real estate

development decreased by 7.9 percent year on year. Specifically, investments in

residential housing development decreased by 7.3 percent year on year.

Table 14 Floor Area of Newly Started, Under Construction, and Completed Real

Estate Projects in H1 2023

Floor area

(100 million square

meters)

YOY change (%)

Growth change from

the previous quarter

(percentage points)

Floor area of newly started real

-estate projects

5.0

-24.3

-5.1

Floor area of real estate

projects under construction

79.2

-6.6

-1.4

Floor area of completed real

estate projects

3.4

4.3

Source: National Bureau of Statistics of China.

At end-June, outstanding real estate loans by major financial institutions (including

foreign-funded financial institutions) grew by 0.5 percent year on year to RMB53.4

trillion. Specifically, outstanding individual housing loans fell by 0.7 percent year on

year to RMB38.6 trillion. Outstanding housing development loans grew by 3.9

percent year on year to RMB9.8 trillion.

7.2 The new energy vehicle sector

Developing new energy vehicles (NEVs) is the path to building China into a world

leader in the automobile industry and also a strategic measure for

addressing climate change and promoting green development. In recent

years, catalyzed by policies, technological progress and market demand, the NEV

sector has made great achievements. First, production and sales saw rapid growth.

According to the statistics of China Association of Automobile Manufacturers,

production and sales of NEVs from January to June 2023 reached 3.788 million and

3.747 million, a year-on-year increase of 42.4 percent and 44.1 percent, respectively.

The market share of domestic NEVs recorded 28.3 percent. In 2022, China's NEV

sales accounted for 65 percent of global sales, ranking the top in the world for

eight consecutive years. Second, exports maintained a strong growth momentum.

NEV exports grew by 1.6 times to 534,000, making China the world’s largest car

exporter in H1 2023, ahead of Japan. The share of domestic NEVs continued

expanding in the international market, and Europe has become China’s largest trading

partner in NEV exports. Third, the technique advanced rapidly. The energy

efficiency of pure electric passenger vehicles has been upgraded. The power

of batteries is improving and the average driving range is expanding. According to

statistics of the Ministry of Industry and Information Technology, the average driving

range of China’s domestic pure electric passenger vehicles in 2022 rose to 424

kilometers, up 9.0 percent year on year.

The fast-developing NEV sector is facing challenges. First, innovation capabilities

for core technologies is insufficient. We still need to make breakthroughs in key

technologies such as batteries, motors, and electronic controls, and the quality and

safety of our products are yet to be further improved, which, to a certain extent,

impairs the competitiveness of our NEVs. Second, the industrial ecology is

inadequate. Domestic NEV manufacturers still fall behind world leaders in terms of

quality management. The integrated development of automobile and auto part

enterprises needs to be promoted whereby synergy among power battery and its

upstream and downstream enterprises should be built up. Lack of high-

quality capacity is prominent. Third, infrastructure construction lags behind.

The car-to-charging pile ratio is approximately 2.5:1 in China. The gross charging

facilities is insufficient to meet the growing needs. Meanwhile, charging piles are

lacking in some places but are left idle in others. It is inconvenient for consumers to

access, use, and pay for charging.

Second, we will encourage cross-sector synergy among enterprises in the fields of

NEVs, energy, transportation and information communication, bring into full play the

role of industry-leading enterprises, and upgrade industrial chain modernization.

Third, we will promote the construction of battery charging and swapping network,

expedite the construction of battery charging and swapping infrastructure, and

improve the services of battery charging infrastructure.

Part 5. Monetary Policy Outlook

I. Outlook for the Chinese economy

The national economy is expected to improve continuously. Currently, more bright

spots are emerging in China’s economic development. Corporate production

sentiment is improving and in June and July consecutively the manufacturing

Purchasing Managers’ Index (PMI) rebounded. Due to effective policy support,

market demand is recovering, with summer travel growth surging as shown by the

number of hotel and flight reservations. There are well-grounded reasons for

the continuous recovery of the Chinese economy in the second half of the year. First,

the economy is cycling increasingly smoothly. With the rebound in income growth

and the improvement in the consumer environment, rising consumption will turn into

more income for both businesses and individuals, further enhancing the consumption

potential and producing positive feedback to help expand domestic demand. Second,

the new drivers for growth are gaining steam. Investments in sectors such as new

energy and high-tech services saw double-digit growth in the January–June period,

while production and sales in these sectors are expected to maintain rapid growth.

Third, the policy effects will continue to materialize. Fund injections that have been

made via policy-backed and development-oriented financial instruments will continue

to be a driving force for delivering concrete progress, while infrastructure

investment consistently underpins economic growth. Moreover, with the fast growth

in money and credit, China has an appropriate monetary and financial environment.

Overall, the Chinese economy is expected to continue getting back on track for

normal operations and the major indicators will stay within an appropriate range.

Currently, the external environment is severe and complicated, while domestic

economic operations are facing new difficulties and challenges. From an

international perspective, geopolitical tensions remain high, mounting risks of de-

globalization are weighing on the world economy, and the cumulative effect of this

round of interest rate hikes by the advanced economies will continue to play out to

influence the global economic and financial situations. From a domestic perspective,

income expectations are still unstable, the recovery of consumption will take time,

and private capital lacks confidence in investments. Furthermore, some enterprises are

having a hard time, there are production lines moving out in some industries, and

local governments are under greater pressure to achieve a fiscal balance. Nevertheless,

it should be noted that the Chinese economy has strong resilience and a huge

potential for development. The fundamentals for China’s sound economic

growth over the long run remain unchanged. Economic recovery calls for patience

and confidence as it is a process of wave-like development and zigzag progress. We

should continue to deepen reform and opening-up across the board and focus on

expanding domestic demand, boosting confidence, and preventing risks so that

China’s economic performance will achieve sustained improvement.

Prices are expected to bounce up. In the first half of the year, price rises in China

slowed down amid fluctuations. While the CPI came in flat in June compared with the

same period of the last year, the July CPI saw –0.3 percent growth year on year, a

temporary phenomenon mainly caused by the base effect as well as the time lag in the

recovery of demand. Currently, there is no deflation in China as the macro economy is

witnessing a steady recovery and broad money supply is maintaining rapid growth, a

situation notably different from typical historic cases of deflation. Furthermore, there

will not be any deflationary risks in the second half of the year. Contributing factors

are increasing further to bring about improvements in supply and demand, income

growth continues to recover, people’s willingness to consume is on the rise, and both

the consumption of big-ticket items and that of services are picking up. Overall, there

is a high possibility that the pace of price rises has hit a yearly low. With pork prices

recently beginning to rebound, travel prices climbing much higher, and China’s

refined oil prices seeing their fourth consecutive upward adjustment, the CPI is

expected to start a gradual rebound in August and exhibit a U-shaped trend for the

year. Having shown an improvement on a year-on-year basis in July, the Producer

Price Index (PPI) will likely decline at a slower pace in the future. From a medium- to

long-term perspective, supply and demand in the Chinese economy will be

generally balanced, China will continue to pursue a sound monetary policy and

inflation expectations will remain stable. Therefore, there is no basis for long-term

deflation or inflation in China.

II. Outlook for monetary policy in the next stage

Guided by Xi Jinping Thought on Socialism with Chinese Characteristics for a New

Era, the PBOC will thoroughly implement the guidelines of the 20th CPC National

Congress and the Central Economic Work Conference. Upholding the general

principle of pursuing progress while ensuring stability, it will apply the new

development philosophy fully, faithfully, and comprehensively, and it will play its part

in accelerating the building of a new development paradigm. It will deepen the reform

and opening-up, integrate implementation of the strategy to expand domestic demand

with efforts to deepen the supply-side structural reform, and strengthen macro-policy

adjustments. Also, by developing a modern central banking system and fully

exploring the efficacy of monetary and credit policies, the PBOC will continue its

efforts to achieve better economic performance, enhanced endogenous forces, and

improved social expectations as well as resolution of existing and potential risks so as

to help effectively upgrade and appropriately expand economic output.