(Yicai Global) Aug. 30 --Startingthis week, the Yicai Research Institute willpublishitsChina Financial Condition Index, which includesboth adaily and monthly index.The daily indexeswillappeartogetheron a weekly basis, while the monthlyonewillissueeachmonth. These indexesaredevised to provide new perspectives and measurement toolstoenable analysts to better scrutinizeChina's macro-financial environment.

"The Yicai Research Instituteis compiling itsChina Financial Condition Index to gauge the financing conditions, availabilityof fundingand thedegree of overalltautness ofChina'smacrofinanceand provide asignificant reference to policymakers, financial marketplayers and the general public,"noted Dr.Yang Yanqing,directorof the Yicai Research Institute.

"The daily index respondswith greatersensitivity and can help us pre-judge trendsin the lead up to therelease of oftenlaggingmacro-financial data, while the monthly indexmore comprehensivelyreflectschanges in the financing conditions and situationof the entire society,"she added.

The daily index of the China Financial Condition Index stood at 0.31 on Aug. 28, and its average figure registered 1.09 in the first half, and the monthly index posted 0.51forlast month, lower than June's0.93. The changes in both indexesattest tothe marginal relaxation of China's financial landscape,especially the rapiddropsince latelast month.

Based on transactionaldata, the daily indexsetsJan. 5, 2015as its starting point. The monthly index is based on transaction-related data and statistical dataspanninga longer range, beginningfrom September 2008.

Zerorepresents the operational average of the index, i.e. the higher the index, the morerestrictivethe financial environment; the lower the index, themore laxit is.

GlobalTrendto EmbedFinancialFactorsinMacroPolicySuitsChina'sConditions

After the financial crisis of 2008, countries' discussions of and retrospection on financial volatility and its influence on the macroeconomy have never ceased. One key achievement of his analysis is the inclusion of financial factors into macroeconomic models.

Perthetheoreticalmodel ofWestern central banks, China's central bankcan impact consumption and investmentonly by adjusting short-term policies and interest rates.Monetary policy can be limited in variouswaysinimplementation, however, empirical evidence shows,e.g. constraints on theregulatory regimeson financial institutions may lead toaninsufficient supplyof funds, whileasymmetric information betweenaborrower and lender maycausefunding costs todeviatefromabalanced level.

Long-termloose monetary policyplusChina'stight credit policy showsthat neithermoney marketshort-term interest ratesnorcompanies'long-term loan interest ratesare suitable indicators ofthecircumstances ofoverall societal financing.

Since 2018,thePeople's Bank of Chinahasslowedthepaceof itsinterest raterises and only respectively improved five basispoints of reverse repurchase ratesviaopen marketoperationsandmedium-term lending facility interest rates, whileimplementing a'targeted reduction of reserve requirement ratio'three times in mid-April to promptfinancial institutionstosupport the financingofsmall andmicro-sizedcompanies.

However, the growth ofthe scale of non-governmentalfinancingand broad money (M2) is still slowing.Theincrease in therate oflevelsofsuch publicfinancing dropped to 10.3 percentannually last month toreach the lowest point since thefirst appearanceof'societal'financing data.

Short-term loose monetary conditionsand long-term tight credit expansiondisplaya sharp contrast, however.

Thefinancial market isundoubtedlyprovingpivotalin themechanism forconductingmonetary policy. The series of indexes of China'sfinancial condition CNB Research Instituteis issuingencompasses various market data and indexes such as interest ratesinmoney markets,the curveofsovereignbond return rates, interest marginsof credit debt,and asset price indexes.Thisseries of indexes can help the public better measure the overall social macroeconomic environment byreferringtothefinancing circumstances of various entitiesto the greatest degree possible.

FinancialConditionIndexMeasuresChinaFinancialMarket's 10-YearDevelopment

Based on themonthlyperformanceregistered in theChinaFinancial Condition IndextheInstitute publishes, China'sfinancial markethas transitedthefollowingstages since September 2008.

The firstphase was from September 2008 to December 2009 whenthe countryimplemented a loose overallfiscal policy in financial markets.Specifically, the monthly indexplungedto minus 2.10 in March 2009 from 0.62 in September 2008 andhoveredatalowlevelthereafterthroughout the period.

At the end of 2008,toweatherthe global financial crisis,theChinese government introducedapolicy of stimulus packagesworth asmuchas CNY4 trillion, during whichtimePBOC reduced the interest ratefive times andtheRRR four times, resulting in an environmentfeaturingloose monetary and credit policies.The great demandforfinancing boosted aseriesof off-balance sheet activities of banks and interbank innovations.Thispracticeofbanks bypassing trustschemesprovides a financingplatformfor real estate companies and local governments, andspurring the rapid development ofthe shadow bankingsector.

The secondphaseranfrom January 2010 to September 2011 when China began to implement tight fiscalpolicies.The monthly index gradually increased to 1.86 in September 2011 from minus 1.23 in January 2010. To cope with the rapid surge oftheconsumer price index and asset prices, Chinese authoritiesgradually stopped implementing thisstimulus package from 2010 to 2011 and PBOC respectively raised the RRR 12 times and benchmark deposit and loan interest ratesonfiveoccasions.

China Banking Regulatory Commission frequently issued documentsat this time oncooperation between banks and trust companies.For example,DocumentNo. 72 of 2010 required thefinancialcooperation between banks and trust companies should transitionfrom off-balance sheet to on-balance sheet anduseset aside provisions, whereasDocument No. 102 clarified that financial capital is not allowed to directly purchase credit assets.

The third stagebeganinOctober 2011and continuedto December 2014 when China was inthe midst ofa tightoverallfinancial environment. The monthly index fluctuated between 0.21 and 1.72 during thisperiod. In 2012, Chinacame undergreat pressureforeconomic growth, with the increase rate of real gross domestic growth falling to 7.9 percent from 9.5 percent in the previous year, and CPI and asset pricesretreating.PBOC cut interest rates and RRR twice during that year in a bid to alleviate the financing pressure on small- and medium-sizedcompanies and boost economic growth,while brokers and funds relied on channel-type businessesto find their way into the off-balance-sheet assets of banks amid financial innovations encouraged across the securitiessector.

TheCBRC issued DocumentNo.8 in March 2013 to control the scale of non-standard bond assets,mandating that the'non-standard'balance of financial funds at any timecouldnot exceed 35 percent of the balance of financial products and 4 percent of the total assets disclosedinthe audit reportsof commercial banks for the previous year, whicheverwas lower.To meet the requirement of'non-standard'proportion, financial institutions inflated theirdenominatorsthrough inter-bank liabilities, resulting in mounting interest rate fluctuations in the money market, followedby a'money crunch'in June and December 2013.

The fourthsegmentwasfrom January 2015 to November 2016,whenChina ushered in a new loose cycle foritsfinancial environment, as a decline in the monthly index from 0.51 in January 2015 to minus 1.05 in November 2016attests.

In 2015, GDP growth slumped below 7 percent and the Chinese economy enteredthe'new normal.'That same year, PBOC reduced the benchmark deposit and loan interest rates five times andtheRRR four times, and also built the interest rate corridor system toholdthelid on theturbulent money market in response to a potential decline in funds outstanding for foreign exchange and the risks ofadownward economy.Loosened purchase restrictions on property and local debt replacementalsopushedupfinancing demand, andeasedcapital fundamentals brought with themagrowingriskappetite.

The fifth stage from December 2016 to Junethis year sawChina's financial development fluctuatingtoward a tighterrange, with the monthly index climbing from minus 0.43 in December 2016 to 0.93inJune. At the end of 2016, the Central Economic Work Conference set the tone ofaprudent and neutral monetary policy amid a tightening monetary policy and financial regulation.

The credit crisis triggered by the scandal of bonds'forged'by Sealand Securities forced the regulator to crack down on financial chaos. In late Marchlast year, the CBRC rolled out special measuresina series of documents to deal with'three violations,''three arbitrages'and'four improprieties.'In July, the State Council set up the Financial Stability and Development Committee to coordinate financial regulation.

In November, the report of the 19th CPC National Congressproposed the dual regulatoryframeworks of'sound monetary policy and macro-prudential policy.'In the first half of this year, the financial environment tightenedfurthercompared with last year as the new regulationskicked in, accompanied byamarginal relaxation of monetary policy.

PBOC took advantage of'targeted reserve ratio cuts,'collateral expansion and other means to support the financing of the real economy in an effort to unclog the monetary policyconductchannelto flow fromlax money to loose credit.

China's financial environment is likely migratingtoward a new phasestarting from July,butmore datais neededto supporta judgment as to its future course.The State Council executive meeting held July 23 raised the target of'maintaining a moderate scale of social financing and reasonable and ample liquidity,'resulting in a significant decline in the daily index, which now fluctuates around zero, or the historical average level.

China'sfinancial environment is expected to be looser,followingameetingofthe Political Bureau of the CPC Central Committee on July 31, under the principle of'stabilizing employment, finance, foreign trade, foreign investment, investment and expectations.'

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Editor: Ben Armour