Monetary policy regulation in China and the United States often differs. In addition to the unsynchronized economic cycles causing the directions of Chinese and American monetary policies to often be inconsistent, the two major economies also have their own characteristics in the use of monetary policy tools. In recent years, China's monetary policy has mainly focused on adjusting the statutory reserve requirement ratio and has increasingly used structural monetary policy tools. Although the Federal Reserve also uses quantitative tools (such as quantitative easing, asset purchases, etc.), it still primarily adjusts the federal funds rate.

I. China's monetary policy mainly adjusts the reserve requirement ratio, while the United States mainly adjusts interest rates.

The statutory reserve requirement ratio is the ratio of the reserves that commercial banks are legally required to hold to the deposits they accept. The deposits accepted by commercial banks cannot all be lent out; a portion must be retained at the central bank according to the statutory ratio. Currently, China has divided the reserve requirement ratio into three levels based on the size of the banks. The six major commercial banks, including Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, China Construction Bank, Bank of Communications, and Postal Savings Bank of China, implement a reserve requirement ratio of 10.75%. Joint-stock commercial banks, city commercial banks, foreign banks, and some rural commercial banks with larger scales implement a reserve requirement ratio of 7.75%. Rural credit cooperatives, rural cooperatives, rural banks, and rural commercial banks serving county areas implement a reserve requirement ratio of 5%.

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Since 2016, China's statutory reserve requirement ratio has been adjusted 20 times, all downward adjustments (reserve requirement ratio cuts). Among them, there were 8 times the reserve requirement ratio was reduced by 0.5 percentage points, and 4 times it was reduced by 1 percentage point. During the same period, China's policy interest rates (such as the Medium-Term Lending Facility (MLF) rate) have been adjusted 12 times (the most recent two policy interest rate cuts were in June and August of this year), among which, there were 4 upward adjustments (interest rate hikes) and 8 downward adjustments (interest rate cuts), mainly adjusting by 5 to 10 basis points each time, with the largest one-time cut being 15 basis points. Currently, the one-year MLF rate is 2.50%.

In contrast, the use of monetary policy in the United States mainly focuses on adjusting interest rates. Since the 1980s, the Federal Reserve has primarily used the adjustment of short-term interest rates (the federal funds rate) to achieve the dual mandate of employment and inflation. The so-called federal funds rate is the interest rate at which commercial banks borrow or lend reserves. To this day, this rate remains the main policy tool of the Federal Reserve. Since 2016 (as of August 31, 2023), the U.S. policy interest rate (the federal funds rate) has been adjusted 24 times, with 19 upward adjustments (interest rate hikes) and 5 downward adjustments (interest rate cuts), mainly adjusting by 25 basis points each time. Since the pandemic, the adjustment has been larger, mainly by 50 basis points, and even up to 75 basis points. Currently, the target range for the federal funds rate is between 5.25% and 5.5%.

In terms of decision-making procedures, the convenience of the Federal Reserve's interest rate regulation is much higher than the adjustment of the reserve requirement ratio. The Federal Reserve adjusts interest rates mainly through the 8 interest rate meetings held annually in Washington. Members of the Federal Open Market Committee (FOMC) vote to decide whether to raise or lower the federal funds rate. Adjusting the statutory reserve requirement ratio in the United States is more complex, requiring amendments to the Federal Reserve's Regulation D (Reserve Requirement of Depository Institutions), which requires approval by the Board of Governors of the Federal Reserve System. The Board of Governors of the Federal Reserve System is the management body of the Federal Reserve, overseeing the operation of the reserve banks and providing general guidance. All 7 members are nominated by the president and appointed by Congress, and all are members of the Federal Open Market Committee. Although the Federal Reserve's adjustment of the statutory reserve requirement ratio does not require direct consent from Congress, it still needs to go through a series of internal analyses and discussions before being approved according to legal procedures. Since the statutory reserve requirement ratio is directly related to the profits of commercial banks, the American liberal tradition, election pressures, and the emphasis on the market mechanism playing a fundamental role in resource allocation all make the Federal Reserve more cautious when using this tool.

Since the 1990s, the Federal Reserve has hardly used the reserve requirement tool. Unlike China's "three-tier" reserve requirement ratio, the Federal Reserve sets different reserve requirement ratios for different accounts (net transaction accounts, non-personal time deposits, Eurodollar deposits) and different amounts (for net transaction accounts), with the same regulations between institutions. On December 27, 1990, the Federal Reserve set the statutory reserve requirement ratio for non-personal time deposits and Eurodollar deposits to 0, which has remained unchanged. On March 26, 2020, the Federal Reserve set the statutory reserve requirement ratio for net transaction accounts to 0. Before that, it was stipulated that for net transaction accounts below the "reserve requirement exemption amount," the reserve requirement ratio was 0; for those exceeding the "reserve requirement exemption amount" but below the specified amount of the "low reserve portion," the reserve requirement ratio was 3%; for those exceeding the "low reserve portion," the reserve requirement ratio was 10%. Since then, the statutory reserve requirement ratio for all deposits of all financial institutions in the United States has been 0.

II. The implementation of China's monetary policy requires more cooperation from the commercial banking system.

Unlike fiscal policy, which can directly intervene in economic activities, monetary policy generally has an indirect effect and requires the cooperation of commercial banks and even the entire financial system. The effectiveness of its implementation is greatly influenced by market feedback.

Generally speaking, contractionary monetary policy is more likely to have an impact on the economy, and when the economy faces downward pressure and needs to encourage credit expansion through liquidity easing, commercial banks often "hoard loans." The process of transmitting the central bank's accommodative monetary policy to the real economy will be hindered, and the excess reserves of commercial banks will increase significantly. For example, after the 2008 financial crisis, the excess reserve rate of U.S. commercial banks increased sharply. Until now, the excess reserve rate of U.S. commercial banks is still as high as 15.3% (July 2023). In such a situation, the effectiveness of reserve requirement policy will be greatly reduced. Taking raising the statutory reserve requirement ratio as an example, due to the high excess reserve rate of commercial banks, part of the excess reserve is converted into statutory reserves, and the liquidity constraint of banks hardly changes.At present, the excess reserve requirement ratio of financial institutions in China is only 1.6% (as of June 2023), a decrease of 0.1 percentage points from the end of March, and the lowest value since 2022. At this juncture, reducing the statutory reserve requirement ratio is quite effective in improving the liquidity of commercial banks.

A significant characteristic of China's financial system is the predominance of indirect financing, making the role of commercial banks even more critical in the country's monetary policy regulation. Currently, Chinese commercial banks have few avenues for capital replenishment and are under high capital pressure. Against this backdrop, maintaining a certain level of net interest margin and profits for commercial banks can effectively help banks replenish core capital and enhance their ability to serve the real economy.

Looking at the Loan Prime Rate (LPR) quotes, the 1-year LPR is at 3.45%, and the LPR for terms of 5 years or more is at 4.2%, both at the lowest levels since the LPR reform in August 2019. This reflects the financial sector's concession to the corporate sector in China's current counter-cyclical regulatory policies. In the first half of this year, commercial banks cumulatively achieved a net profit of 1.3 trillion yuan, a year-on-year increase of 2.6%, a decrease of 4.5 percentage points from the same period last year. Currently, the net interest margin of Chinese commercial banks is at a historical low. As of the end of June, the net interest margin of Chinese commercial banks was 1.74%, the lowest since statistical data began in 2010. In contrast, under the recent context of consecutive interest rate hikes overseas, the net interest margin has significantly recovered, with the average net interest margin of U.S. banks already exceeding 3.3%. A net interest margin higher than the non-performing loan ratio will be an important guarantee against bank risks.

III. The interest rate elasticity of consumption and investment in China is relatively low, especially during economic downturns.

From the historical experience of China over a long period, the interest rate elasticity is relatively high during periods of high economic growth and stable growth; during times of poor economic growth, the interest rate elasticity is often very low. This is because, during periods of economic upturn, residents' incomes increase, and they tend to be more willing to consume and pursue investment returns, at which time interest rate adjustments have a significant impact on consumption and savings; during economic downturns, the growth rate of residents' incomes weakens, and they tend to increase savings and delay consumption, at which time the role of interest rate cuts in promoting consumption may be more limited. Similarly, during periods of economic upturn, corporate investment returns are relatively high, and their financing needs are more sensitive to interest rate changes; during economic downturns, corporate investment mainly considers risks rather than interest rate costs. Therefore, during economic downturns, the interest rate elasticity of investment is also not high, and even lowering interest rates may not necessarily stimulate investment.

This year, the downward trend in interest rates has coexisted with the slowdown in consumption, which means that relying solely on lowering deposit interest rates may be difficult to bring about an increase in residents' consumption. There are many reasons for this. First, when expecting a decline in future income, residents will cautiously consider current consumption choices. Second, low asset prices will strengthen residents' willingness to deleverage, further suppressing consumption. Currently, China's real estate market is generally sluggish, and residents who buy houses with medium and long-term mortgage loans expect a decline in asset returns and may be lower than the cost of liabilities, thus they are more inclined to repay loans in advance rather than increase consumption. Finally, residents' risk preferences are gradually decreasing, and the continuous accumulation of precautionary savings will also drag down current consumption. From 2018 to 2021, the average annual increase in deposits for China's resident sector was 9.5 trillion yuan, and in 2022 it was as high as 17.84 trillion yuan, while in the first quarter of 2023, the increase in deposits was 9.9 trillion yuan, with a cumulative increase of 11.1 trillion yuan from January to July.

In addition, China's interest rate marketization has not been fully completed, and some important interest rates have not been fully marketized, such as deposit interest rates. This means that the impact of changes in China's policy interest rates on other market interest rates is not yet strong, and thus the regulatory effect on investment and consumption still needs to be improved. This is also one of the reasons why China's central bank rarely adjusts policy interest rates. Otherwise, in the absence of completed interest rate marketization, over-reliance on interest rate regulation not only fails to achieve policy objectives but may also bring potential financial risks, such as liquidity pooling in the financial system. In contrast, U.S. residents and businesses have a richer array of investment and financing channels, and the degree of interest rate marketization is high. After the Federal Reserve adjusts policy interest rates, financial institutions and financial market interest rates change accordingly, thus having a more direct and significant impact on the consumption and investment of residents and businesses.

IV. The ways in which monetary and fiscal policies are coordinated in China and the United States are different.

At present, about 69% of China's national debt is held by commercial banks, and about 86% of local government bonds are held by commercial banks. On July 24 of this year, the Central Political Bureau meeting proposed to accelerate the issuance and use of local government special bonds. As of the end of August, local governments have issued 82.5% of the annual quota for new special bonds, compared with 96.4% for the same period last year. The Ministry of Finance stated that it aims to basically complete the issuance of new special bonds by the end of September this year. Lowering reserve requirements will increase the funds that commercial banks can freely use, thereby better supporting the issuance of national and local government bonds. From this point of view, the possibility of China lowering reserve requirements still exists.

In contrast, U.S. Treasury bond holders are more diversified. As of the end of 2022, 29.7% of U.S. Treasury bonds were held by overseas investors, and among domestic holders, the Federal Reserve, commercial banks, government funds, and other institutions held 20.7%, 7.3%, 6.1%, and 36.2% of U.S. Treasury bonds, respectively. Compared with commercial banks, the Federal Reserve is a more important holder of U.S. Treasury bonds. Although the Federal Reserve has initiated a continuous balance sheet reduction, it currently still holds more than 5 trillion U.S. dollars in U.S. Treasury bonds, accounting for 61.6% of the total scale of the Federal Reserve's balance sheet.The Federal Reserve's significant holding of U.S. Treasury securities is closely related to its substantial increase in U.S. Treasury bond holdings during the COVID-19 pandemic shock response. At that time, the Fed injected liquidity into the market by massively purchasing U.S. Treasury bonds, while also pushing down U.S. Treasury bond yields, which could reduce the coupon rates of newly issued U.S. Treasury bonds and alleviate the interest burden on U.S. debt. This represents another difference in the coordination of monetary policy between China and the United States from a macro policy perspective.

V. Different Considerations of External Spillover Effects in Monetary Policy Between China and the U.S.

As the dominant currency in the international financial system, U.S. dollar liquidity is ubiquitous globally, and the external spillover effects of the Fed's monetary policy are also very evident. As early as the 1970s, during President Nixon's tenure, U.S. Treasury Secretary Connally once said, "The dollar is our currency, but it's your problem!" This statement highlighted the asymmetric impact of the Fed's monetary policy on domestic and overseas economies. The aggressiveness of the Fed's interest rate hikes in this cycle is rare, and it has also produced a strong external spillover effect. The euro depreciated significantly against the U.S. dollar, even falling below parity with the U.S. dollar in July 2022 for the first time since 2002.

China's monetary policy, while focusing on domestic priorities, also needs to consider both internal and external balance. Currently, at a critical period for economic recovery, it is essential to continue strengthening counter-cyclical regulation, which will help to consolidate the foundation for economic stability and recovery. However, intensifying counter-cyclical regulation may continue to exacerbate the divergence between Chinese and U.S. monetary policies. From an overseas perspective, the recent Jackson Hole Global Central Bank Summit was held. At this summit, both Fed Chairman Powell and ECB President Lagarde expressed concerns about inflation that far outweighed their concerns about economic downturn, conveying a "hawkish" signal that exceeded market expectations.

The signaling effect of China's interest rate adjustments is quite significant, and monetary policy relies more on the regulation of reserve requirement ratios. Currently, the weighted average reserve requirement ratio of Chinese financial institutions is about 7.6%, and there is still some policy space.

In summary, there are many reasons for the differences in monetary policy regulation between China and the U.S. In addition to the different monetary policy decision-making mechanisms, an important factor is that China's economy is primarily based on indirect financing, where the commercial banking system plays a key role in the implementation of monetary policy, and the efficiency of China's reserve requirement ratio policy is relatively higher. Currently, the interest rate elasticity of investment and consumption in China is low, the goals of monetary policy are diversified, and the need to balance internal and external factors also contributes to the differences in the methods of monetary policy regulation between China and the U.S.