Structural monetary policy helps create stable economic environment

By MA LI, YAN FANG / 06-16-2022 / Chinese Social Sciences Today

FILE PHOTO: Monetary policy is a tool used for the government’s macro-control and economic structural adjustments.

A structural monetary policy is a specific type of monetary policy implemented by central banks regarding specific objects. Its main purpose is to direct funds to flow to certain targeted departments and foster structural adjustment. It indicates a new development trend in the field of monetary economics in recent years, which adopts structural monetary policy for macro-control and structural adjustments.
The extremely low interest rate environment which ensued after the global financial crisis led to dysfunction in traditional monetary policies. As a result, fiscal policies, limited by fiscal deficits, failed to be truly loosened. Though quantitative easing can play a role by stimulating the economy in the short term, in the long run, it is unable to promote substantial economic growth. Instead, it might produce a misplaced resource juxtaposition, imbalance in economic structures, and a series of other problems. 
Countering pandemic side-effects 
The COVID-19 outbreak has exerted certain pressures on the Chinese macro economy, especially by affecting family consumption and the development of micro, small, and medium-sized enterprises. Loose monetary policies implemented in the pandemic’s initial period to some extent promoted consumption, investment, and output, but the liquidity it released flowed mostly to large enterprises with stronger abilities to resist risks. The liquidity problem faced by micro, small, and medium-sized enterprises has not been radically resolved. 
Structural monetary policies, by directing funds to flow into those micro, small, and macro enterprises, and consumer industries that were severely affected by the pandemic, can help these businesses recover in a better way. During the pandemic, China has allocated a total of 1.8 trillion yuan of targeted reloans and rediscounted quotas, which invigorated key enterprises within a short time. It also helped alleviate the consumption sector’s dilemma, ensured the employment rate, and increased family incomes.  
Targeting green industry
Due to global climate change and the frequent occurrence of extreme disasters caused by excessive carbon emissions in recent years, macroeconomic development will be affected with reduced productivity in the long term. 
China created two structural monetary policy tools in 2021—one supports carbon emission reduction; the other supports the clean and efficient use of coal through special reloaning. Targeted structural monetary policies with precise goals can better serve the development of green industries, low-carbon technological innovation, and the transformation and upgrading of high-carbon industries. The central bank can further enrich its toolbox of structural monetary policies, and guide commercial banks to increase green finance by using preferential interest rates and allowing more qualified collaterals.
Targeting house pricing restraint
High housing prices will increase residents’ liabilities, which will affect the healthy development of the real economy, and further lead to a higher leverage ratio at macro levels. The consequence is that there will be growing housing bubbles arising from the real estate sector, which will then aggravate the accumulation of financial risks. In order to prevent excessive fluctuations in the real estate market, China has adopted a series of structural monetary policies, such as targeted reserve requirement ratio (RRR) cuts to direct capital to enter into vulnerable links and key sectors of the economy. This supports the real economy and capital is prevented from flowing into the real estate market. 
In addition, China also tried to lower loan interest rates for government-subsidized housing and rental housing in a targeted way. The combination of various structural monetary policies will work together to help support the goal of using housing for daily life and not for speculation. 
As the world now faces greater uncertainties, the Chinese economy is transiting to a phase of high-quality development. In this dual context, it is significant that we explore the role that structural monetary policies play in macro-economic control. This will be conducive to creating a sound and stable monetary and financial environment. By taking this opportunity, we can facilitate economic restructuring and transformation. 
Ma Li and Yan Fang are from the College of Finance and Statistics from Hunan University.