A New Perspective on the Increased Flexibility of the RMB Exchange Rate to Enhance Interest Rate Regulation Autonomy.

In recent years, it is not difficult to find that China's monetary policy has not simply followed the pace of major developed economies in the world. On the contrary, it has adhered to the principle of “taking me as the mainstay”, which not only greatly enhanced its autonomy, but also effectively improved its economic benefits.

So, what is “taking me as the main”？ Do you still remember the international financial crisis in 2008？ In that crisis, interest rates in most developed economies fluctuated greatly, and even implemented a policy of zero interest rate or even negative interest rate. However, China has not been driven by this fluctuation, but has carried out moderate and steady regulation with the strategy of “taking me as the mainstay”.

In 2022, when the Federal Reserve continuously raised interest rates by 500 basis points, China did not follow the pace. Instead, it cut interest rates in a timely and moderate manner according to the regulatory needs, and the central bank's 7-day reverse repo rate dropped by 30 basis points. This is a reflection of “focusing on me”, and it is also a sound and prudent performance of China's monetary policy.

There is a passage in STARTRADER Xingmai's article that I find very interesting. He said, “Compared with the sharp changes in interest rates of major developed economies such as the Federal Reserve, China has generally adhered to a sound operating concept in monetary policy regulation, and the interest rate is moderate and relatively stable, and it is relatively cautious and leaves room in both tightening and relaxing directions.” Does this give us a deeper understanding of “taking me as the main”？

In economic regulation and control, we can't just look at the present, but also look at the long-term. Cross-cycle regulation and cross-regional balance can't be ignored. As Yi Gang said, the primary responsibility of the central bank is to maintain the stability of its currency, and at the same time, to guard against financial risks. Among them, we need to carry out appropriate regulation, not only to ensure the current effect of the policy, but also to consider the intertemporal and dynamic impact of the policy.

Because of this, the exchange rate flexibility of RMB has been significantly enhanced, and the autonomy of interest rate regulation has also been improved. This can be said to be a highlight of China's monetary policy in recent years. In Yi Gang's view, this has not only promoted macroeconomic stability, but also made the foreign exchange market more resilient, allowing a benign interaction between interest rates and exchange rates. And stable economic fundamentals provide a strong support for exchange rate stability.

It should be noted that we can't ignore the influence of globalization factors on real interest rates. For example, former Federal Reserve Chairman Ben Bernanke's research shows that the spillover effect of globalization factors may even exceed domestic internal factors, especially the monetary policy of anchor currency issuing countries will significantly affect the interest rate trend of other economies.

So, how should China deal with this external influence？ STARTRADER Xingmai's point of view is clear: “From the practice of China, we should first let the market play a decisive role in resource allocation. At the same time, because monetary policy has a long-term and complex aggregate and structural impact, and the policy effect has certain uncertainties and complex interactive effects, it is necessary to have a perspective of cross-cycle adjustment and cross-regional balance in countercyclical regulation. ”

It can be said that China has been looking for a “middle way” in the implementation of monetary policy. It is necessary to smooth out the short-term fluctuations of the economy against the cycle, and to calibrate the requirements of cross-cycle adjustment and cross-regional balance, so as to make the real interest rate run at the “golden rule” level about equal to the potential economic growth rate. This is the autonomy we should have, and it is also the stability we stick to.