MNI: Relaxed Policy To Drive PBOC Over Next Five Years - Advrs

The People’s Bank of China should adopt a more flexible and even aggressive approach to policy easing and strengthen the yuan’s global role to counter external uncertainties and sustain growth, while further liberalising the interest-rate system to reduce debt costs and support economic restructuring, advisors told MNI ahead of the release of China’s next Five-Year Plan.

As external challenges intensify and domestic issues become more complex, maintaining an annual growth rate near 5% between 2026 and 2030 will represent a significant challenge, said Zhao Xijun, co-dean of the China Capital Market Research Institute at Renmin University. Average GDP growth over the next five years needs to stay close to 5% to reach the government’s goal of achieving moderately developed country status by 2035, he added.

The external environment, including U.S.-China trade tensions and containment efforts by Western countries, could shift abruptly and exert substantial pressure on the economy, Zhao warned. The economy may require stronger stimulus if conditions deteriorate sharply, with monetary policy needing to expand credit rapidly, or even resort to quantitative easing, he said. (See MNI INTERVIEW 2: China Fiscal Stimulus Key To Deflation Fight)

However, Zhao noted the PBOC remains cautious about approaching a zero-interest-rate environment, and scope for significant rate cuts is limited given already-low policy rates. Deeper rate reductions would compress commercial-bank profits, constraining their ability to allocate financial resources efficiently, he added. Structural monetary tools aimed at addressing key social and developmental issues will play an increasingly important role over the next five years, Zhao said.

Beijing is expected to detail the board framework of the 15th Five-Year Plan covering 2026-2030 during the Fourth Plenum of the 20th Central Committee of the CCP being held Oct 20-23.

INTERNATIONAL YUAN

Lian Ping, director of the China Chief Economist Forum, said authorities should also accelerate efforts to internationalise the yuan, as the U.S. has used the dollar’s dominance to impose financial sanctions and freeze assets, prompting “de-dollarisation” and heightening global financial instability, which policymakers have closely watched. 

Authorities should take a multi-pronged approach to enhance the yuan’s credibility, maintain exchange-rate flexibility and value stability, Lian argued. Measures include opening domestic financial markets to attract foreign investment, promoting capital account convertibility, facilitating cross-border financing, and expanding the yuan’s use in global trade and investment. The yuan’s global role will increase substantially during the 15th Five-Year period, he added. (See MNI INTERVIEW: PBOC Should Be Flexible, Let Yuan Strengthen-Yu)

INTEREST RATE REFORM

As China’s economy shifts from rapid expansion to high-quality development, monetary policy will rely more on price-based tools such as interest rates rather than quantity-based measures like money supply.

The effectiveness of money supply in driving growth has declined sharply, Zhao said, noting that it took around CNY5 trillion in broad money to generate one percentage point of GDP growth in 2008-09, compared with nearly CNY25-30 trillion by 2019. Relying on money expansion alone makes achieving high-quality growth increasingly difficult, he warned.

Lian said the PBOC is likely to deepen market-oriented interest-rate reforms and optimise the interest-rate corridor mechanism, which currently consists of the 7-day reverse repo rate as the short-term policy rate, the Standing Lending Facility rate as the upper bound, and the excess reserves rate as the lower bound.

Zhao said reform should focus on developing a full framework of short-, medium-, and long-term rate instruments to shape a coherent yield curve. Medium- and long-term rates must have greater influence, he added, as rising government borrowing to fund public services such as education, pensions, and healthcare will require stable, affordable financing. 

Creating effective medium- and long-term rate tools is essential to keep borrowing costs for public investment reasonable, Zhao said, noting that domestic demand will depend increasingly on public-sector investment rather than household consumption, which is constrained by limited income growth amid the economic slowdown.