What does it mean that the central bank has turned over the balance of profits to the central finance exceeding 1 trillion yuan?
Author: Du Chuan
The central bank turns over the balance of profits, which will not cause a fiscal deficit and has a limited impact on liquidity.
On the evening of March 8, the People's Bank of China reported that in accordance with the spirit of the Central Economic Work Conference and the deployment of the government work report, in order to enhance the available financial resources, the People's Bank of China will hand over the balance of profits to the central government according to law this year, with a total amount of more than 1 trillion yuan, mainly used for Tax rebates and increased transfer payments to local governments will support the relief of enterprises, stabilize employment and protect people's livelihood.
Are central banks also profitable?
What does it mean for the central bank to turn over profits?
Why not financial overdraft?
The first financial reporter interviewed relevant industry experts.
Guan Tao, the global chief economist of BOC Securities, told Yicai.com: "The central bank will turn over the balance of profits to increase the central financial resources. Since it is a non-tax revenue of the government, it will not cause a fiscal deficit."
is a common practice in the world's major economies
In fact, the issue of the central bank turning over the balance of profits to the central finance has already been mentioned in official documents.
In the 2022 government work report, it is proposed that certain state-owned financial institutions and franchised institutions will turn over their profits from recent years in accordance with the law.
The relevant person in charge of the Ministry of Finance stated that it is a common practice in my country to arrange for specific state-owned financial institutions and specialized institutions to turn over profits, and it is also an important means of coordinating financial resources and adjusting funds across years, including China National Tobacco Corporation, China Investment Corporation, etc. The People's Bank of China It is also one of the payment units.
According to Article 39 of the Law of the People’s Republic of China on the People’s Bank of China, “The net profit of the People’s Bank of China after deducting the annual expenditures from the income of each fiscal year and drawing the total reserve in accordance with the proportion approved by the financial department of the State Council shall be turned over in full. According to the regulations of the central government, the profits handed over by the People's Bank of my country conforms to the provisions of Chinese laws.
Guan Tao told reporters: "This is not the first time the central bank has turned over the balance of profits. Usually, it is turned over on an annual basis."
The above-mentioned person in charge said that it is also a common practice in the world's major economies to turn over the profits of the central bank to the finance. The Federal Reserve Act, the Bank of Japan Act, and the Bank of England Act all have similar provisions.
According to public data, in 2020, the Fed’s net profit will reach $88.8 billion, an increase of $33.3 billion from 2019; it will hand over $88.5 billion in profits to the U.S. Treasury, an increase of $33.6 billion from 2019.
Foreign exchange reserve operating income balance profit
Although the People's Bank of China is special as the central bank, it also has income, which generally includes interest income, that is, financial institutions' re-lending interest income, re-discount interest income, etc.; business income, namely foreign exchange reserve operating income, gold and silver business income, securities trading income, etc. ; and other income.
The central bank said that the PBC's balance profit mainly comes from the operating income of foreign exchange reserves in the past few years, which will not increase the burden of taxation or economic entities, nor is it a fiscal deficit.
The People's Bank of China shall turn over the balance of profits to the central finance in accordance with the law, which will not cause the finance to overdraft to the central bank.
Balanced profits are turned over on a monthly basis, and the scale of the PBC's balance sheet remains stable, reflecting the coordination and linkage of monetary policy and fiscal policy, and jointly exerting efforts to stabilize the macroeconomic market.
"This year's government work report specifically mentioned that the central bank's profits should be turned over to the finances. In fact, central banks around the world do the same. For example, the Federal Reserve purchased a lot of assets during the subprime mortgage crisis, a large part of which were US treasuries, and even purchased through SPV. Citi stock, after the financial crisis eased, the Federal Reserve began to withdraw from the quantitative easing policy, and sold treasury bonds in the secondary market, including the recovery of Citi stock after the sell-off, and gained a lot of money. ” said Wen Bin, chief researcher at China Minsheng Bank.
Xie Yunliang, chief macro analyst at Cinda Securities, also said: "Every time the Fed rescues the market in a crisis, it is profitable in the end."
Wen Bin said that the central bank also has the characteristics of operation.
From the asset side, MLF (Medium-Term Lending Facility) issuance, reverse repurchase operations, and foreign exchange reserve investment operations will all generate income.
In recent years, my country's foreign exchange reserves have adhered to the three principles of liquidity, profitability, and safety to manage foreign exchange reserves. The income from foreign exchange reserves is relatively stable, and it is also the main source of income turned over by the central bank this time.
Guan Tao told the first financial reporter: "For this part of foreign exchange income, if the foreign exchange has been settled, it will be reflected in the foreign exchange account, and if the foreign exchange has not been settled, it will be under the central bank's other foreign exchange assets."
According to the "Financial System of the People's Bank of China", the Ministry of Finance implements an independent financial budget management system for the People's Bank of China. After the income and expenditure of the People's Bank of China's budget are offset, the net amount is included in the national budget.
"This year, the profits turned over by the central bank and specialized institutions have been included in the budget, and the final general public budget expenditure is 26,712.5 billion yuan, an increase of 8.4% year-on-year. Last year's fiscal expenditure increased by 0.3% year-on-year, and the fiscal policy has increased significantly compared with last year, but in order to achieve 5.5 % GDP growth (the nominal growth rate may be around 9%), fiscal policy alone is not enough, and other measures such as easing credit and stabilizing real estate are also needed to form a synergy." Xie Yunliang said.
no fiscal deficit
Does the central bank hand over profits mean "fiscal deficit monetization"?
Since the outbreak of the epidemic, in order to cope with possible risks and challenges, my country has always reserved policy space for fiscal policy measures.
The relevant person in charge of the Ministry of Finance stated that the suspension of profits from certain state-owned financial institutions and specialized institutions to meet emergency needs is one of the reserved policy space measures.
Therefore, the relevant institutions have formed some surplus profits to be turned over, and these surplus profits should be turned over.
Considering the current and long-term future, with the implementation of the new combined tax and fee support policy this year, upon approval in accordance with the procedures, certain state-owned financial institutions and specialized institutions will be arranged to hand over part of the balance of profits formed before 2021 this year.
These funding arrangements are used to significantly increase transfer payments to local governments, helping local finance, especially county and district finance, to ease the pressure of revenue reduction.
The above-mentioned transfer payment funds will be included in the management of the direct mechanism, which will quickly and accurately reach the grassroots level in cities and counties, and directly benefit enterprises and people.
Lian Ping, chief economist of Zhixin Investment Research Institute, told the first financial reporter: "The central bank has made it clear that the surplus profit mainly comes from the operating income of foreign exchange reserves in recent years. Since it is an operating profit, it is not a financial fund, nor is it a financial subsidy. Funds will be allocated, so there will be no fiscal deficit.”
Guan Tao also told reporters: "The balance of profits turned over by the central bank comes from the operating income of foreign exchange reserves, which is itself a non-tax revenue of the government, so it will not cause a fiscal deficit."
The latest data shows that at the end of February this year, my country's foreign exchange reserves stood at US$3,213.8 billion, remaining above US$3.2 trillion for the 10th consecutive month, and the scale of foreign exchange reserves remained generally stable.
"my country's foreign exchange reserves are large, and the operation of foreign exchange reserves in the international market will bring certain benefits. Central banks around the world will also have corresponding institutions to operate foreign exchange reserves or other assets, which will bring profits, so it is not Financial funds." Lian Ping said.
Wen Bin believes that this is fundamentally different from the "monetization of fiscal deficits", which will not have an impact on the market. It will help coordinate fiscal and monetary policies and better support economic development.
"The central bank's turnover of over one trillion yuan of surplus profits will increase the central financial resources, better coordinate with fiscal policy, and help economic development." Guan Tao said.
Xie Yunliang said that the central bank turns over profits, mainly in the category of fiscal policy, and has limited impact on liquidity.
Profits turned over by the central bank into the treasury will not have a direct impact on inter-bank liquidity.
However, when fiscal expenditures are made, they will enter commercial banks from the treasury, and liquidity will be injected at that time, but all fiscal expenditures have this effect.
This policy can be understood as the increase of fiscal revenue by 1.65 trillion yuan, and the significant increase in available financial resources, which is conducive to enhancing fiscal expenditure.
"This is also repeatedly emphasized by the central government. Although this year's fiscal deficit rate has been reduced by 0.4 percentage points from last year to 2.8%, considering the carry-over revenue from the previous year, the profit turned over by the central bank and specialized institutions, and the transfer of budget funds, the intensity of fiscal expenditure is not enough. Guaranteed, the scale of expenditure will increase by more than 2 trillion yuan compared with last year."