Li Dongrong, Chairman of the Internet Finance Association: Five major impacts of Internet finance on monetary policy and four countermeasures

On September 23, at the 7th Asia-Pacific Economic and Financial Forum, Li Dongrong, President of the China Internet Finance Association, delivered a keynote speech on "Internet Finance and the Impact of Monetary Policy Effectiveness". He pointed out that the impact of Internet finance on monetary policy will be reflected in five aspects:

First, in terms of the implementation environment of monetary policy, the development of Internet finance will bring changes to many environmental factors. First, the development of Internet finance will further enrich the financial organization system, fill the service gaps of traditional financial institutions, promote traditional financial institutions to accelerate innovation and information, and make new changes to the main objects of monetary policy regulation.

Second, it can quickly understand local financial risks.

Third, in terms of monetary policy tools, Internet finance and development will help improve the effectiveness of price-based monetary policy tools, but this will reduce the effectiveness of magnitude monetary tools.

Fourth, in terms of the monetary policy transmission mechanism, the development of Internet finance will bring challenges to the traditional monetary policy transmission mechanism and regulatory effectiveness.

Fifth, in terms of the intermediate targets of monetary policy, the development of Internet finance will reduce the effectiveness of the intermediate targets of traditional monetary policy. In response to the above five major impacts, Li Dongrong proposed coping strategies and policy recommendations for achieving the transformation of the monetary policy framework under the new situation:

First, we need to improve the monetary policy transmission mechanism and continue to deepen the interest rate marketization reform. Second, we need to optimize the intermediate goals of monetary policy. With the development of Internet finance, we should adjust the statistical scope of money supply and total social financing in a timely manner to make them more objective and complete, and enhance the measurability and relevance of indicators.

Third, we need to strengthen monitoring of Internet finance.

Fourth, we need to gradually build a target interest rate and interest rate corridor mechanism.

The following is the transcript of the speech:

Li Dongrong: There are two very significant characteristics in the financial reform and development. The first characteristic is its marketization, that is, its marketization degree is still relatively fast in various industries in China, or has a relatively large impact. The second characteristic is its informatization, that is, the Fintech we are talking about now, that is, using this modern information science and technology to change our financial supervision and improve our financial services. It is precisely because of these two characteristics that our financial industry in China has achieved very rapid development after the reform and opening up. I have deeply experienced this. In 1984, I just graduated from college and went to work. My first job was statistics. Statistics means using abacus. I was in the Chinese Abacus Association at that time. I graduated from this school. The Chinese Abacus Association was located here. I had passed the exam at the level of several levels of abacus, but I was stupid and slow. But later, in the first few years of my work, I couldn't do without the abacus every day. But later, with the widespread use of calculations, we gradually left the abacus. Not only did we leave the abacus, but our entire statistical business processing, our credit business processing, our credit reporting business processing, and our payment business processing all widely used our information technology.

Under the mobile Internet situation, it has developed even more rapidly, so I deeply realize that information technology is the foundation for driving the development of our Chinese finance.

From the current perspective, Internet finance is not only the application of modern digital technology to traditional financial services, but also the new characteristics, new formats and new models in the financial field as the modern economy enters the information and digital era. This will not only affect residents' consumption, investment, payment methods and habits, but will also have a major impact on traditional financial institutions, financial markets, financial supervision, financial ecological environment, etc. From the perspective of financial macro-control, these impacts and shocks will inevitably bring a series of changes and challenges to the monetary policy tools, intermediate targets and transmission mechanisms that we have relied on for a long time.

The deep integration of the Internet and finance is an inevitable trend. How to correctly understand and grasp the impact of the development of Internet finance on the effectiveness of monetary policy is a forward-looking and pioneering topic worthy of in-depth discussion in our theoretical and policy circles. Here I would like to combine my previous work practice experience on this topic. Since I have been engaged in currency and foreign exchange related work, I have some practical experience. Combined with my previous work practice experience and my initial exploration of Internet finance, I would like to talk about some of my superficial understandings for your reference today.

First, in terms of the implementation environment of monetary policy, the development of Internet finance will bring changes to many environmental factors. First, the development of Internet finance will further enrich the financial organization system, fill the service gaps of traditional financial institutions, promote traditional financial institutions to accelerate innovation and information, and make new changes to the main objects of monetary policy regulation.

In China today, when we used to talk about Internet finance, we mainly talked about the Internet plus finance, such as BAT, and a series of new third-party payment companies, etc. In fact, the entire Internet finance is not only this part, but also includes finance plus the Internet. This part has changed significantly in recent years. All of our traditional business systems, that is, our major banks, have deeply realized that in this digital age, if our financial institutions do not change our ideas and business models, we will be abandoned by this era. To use a common saying in basketball clubs, there is no brotherhood without basketball. Today, there should be no finance without the Internet. This feature has become very significant. Major banks have accelerated their understanding, actions, and pace in this regard. For example, the Industrial and Commercial Bank of China has proposed to rebuild an Industrial and Commercial Bank of China. The new ICBC is EICBC. Some other banks have also reorganized their original institutional settings, integrating online banking, online banking, mobile banking, and telephone banking. The basic starting point of the integration revolves around the development of the Internet and the development of mobile Internet, and how to adapt to this trend.

Many of our banks, securities companies, and insurance companies have also established financial service groups, which are basically based on numbers and information. Therefore, traditional financial institutions have also realized that if they do not take this path, they will be in great difficulty.

Second, Internet finance has cross-border and interdisciplinary characteristics, which has accelerated the development of multi-level financial markets. The competitiveness and correlation between financial markets have been significantly enhanced.

Third, Internet finance extends financial services to long-tail customers that traditional financial institutions cannot serve or serve poorly, thereby expanding the coverage of financial infrastructure such as credit reporting and payment. We have already seen deeply that in the process of China's reform and development, although China's financial institutions have made significant improvements in terms of scale, personnel quality, and service methods, there are still significant breakthroughs in the concept of traditional financial services. Because China is vast and rich in resources, and transportation is inconvenient in some places, financial institutions are developing towards marketization, so if they want to set up each branch institution, they must first withstand the test of market rules, that is, whether my cost can be covered and whether my cost is acceptable. Therefore, many places complain that our financial services have not been achieved, and there are many places without financial service outlets, requiring us to achieve no gaps in financial services. In some relatively remote areas, relatively backward areas, or sparsely populated areas, if financial institutions are set up according to the traditional model, then this cost issue is a relatively contradictory thing between commercial financial institutions.

So we often hold meetings, and the leaders of the State Council raise the issue of how to solve the problems of difficulty and high cost of financing, and how to solve the problem of financial service coverage. In the past, we also expected our policy banks to solve these problems, but in fact, they have not been completely solved. Of course, this problem is not unique to China, but exists in financial institutions all over the world.

So in this case, in the Internet era, it is possible for us to use modern information technology to extend the coverage radius, or extend and expand it, so as to achieve full coverage, or solve the problem of the last mile of our financial services.

Fourth, the multi-dimensional openness and multi-interactive nature of modern cyberspace make the impact of Internet finance's risks, diffusion speed, and spillover benefits far exceed those in the traditional financial environment, bringing challenges to the traditional industry-specific regulatory model and macro-control methods. This is also a positive correlation, that is, the application of Internet technology in the financial industry has significantly improved our expansion efficiency, but the risk transmission effect is also a positively correlated factor.

I remember that we had a bank run in the 1990s, but due to underdeveloped communication conditions, it was limited to a county or a township. We handled this situation before. When a bank run occurred, the first bank asked us where the bank was. I told him it was in a county under Guilin. Now it is different. In one second, the whole world knows where the financial risk occurred. So this has a great impact on us. This is the first point.

Second, in terms of monetary policy tools, Internet finance and development will help improve the effectiveness of price-based monetary policy tools, but this will reduce the effectiveness of quantitative monetary tools. Our monetary tools are usually one price-based and one quantitative-based, and there is a mutual influence between them. Various emerging formats such as online lending and Internet money funds have expanded the range of consumer financial products and reduced the conversion costs and time costs between various financial assets. Under the Internet, this is a very convenient means, making the financial market more sensitive to interest rates. Everyone will compare a small spread. In the past, under the condition of information asymmetry, the range of choices was very narrow, either ICBC or ABC, and in rural areas it might be rural credit cooperatives. Now on the Internet, with the emergence of direct banks, you can choose a wide range of products and banks on the Internet, which is more attractive to me.

A small change in interest rates may change consumers' financial behavior choices and capital flows, and this change makes price-based monetary policy tools more effective. At the same time, some Internet financial businesses have certain money creation functions, which blurs the boundaries of the traditional currency hierarchy, resulting in a decline in the control over the broad money supply. The effectiveness of quantitative monetary policy tools that focus on the broad money supply will be greatly reduced. Now in the case of convenient payment, in addition to electronic cash such as chips in our banks, we also include our Alipay and WeChat Pay, which have a significant role in replacing cash. So you should pay attention to the structure of the People's Bank of China's money supply. Over the years, the People's Bank of China's money structure has changed a lot. There are at least two points. Let me tell you, the first point is that the M0 part of the money structure has also changed significantly. That is to say, in terms of cash, because there are more channels for electronic substitution and the area is wide, our People's Bank of China's money production and custody pressure is now rising significantly. Where is the second change? In terms of the currency structure, we couldn't find money for a while, including small-denomination coins and large-denomination bills. I remember when I was working in Guangdong in the 1980s, we went to Hong Kong to pass the toll booth. We paid the toll and didn't give cash as change. What did we give? We gave you candy. We didn't have cash or so much change, so we gave you chewing gum as change because cash was not available. Even when I went to Macau to pass the toll booth, the toll booth didn't pay you in RMB, but in Australian dollars. They asked if you wanted it or not. That was in the 1980s and 1990s. Now the currency structure and cash structure have also changed, so our small change supply is not large. After many bills are issued, especially coins, they are deposited in this place. They are very slow to become active. So I believe that with the use of convenient payment in the mobile Internet, this area will undergo more significant changes.

Third, in terms of the transmission mechanism of monetary policy, the development of Internet finance will bring challenges to the traditional monetary policy transmission mechanism and the effectiveness of regulation. Internet finance increases the uncertainty of liquidity demand in the financial market, leading to increased herd effect and market volatility, and increasing the difficulty and cost of the central bank to ensure reasonable market liquidity through open market operations. From the perspective of the credit transmission mechanism, Internet financial formats such as online lending and equity crowdfunding financing have a certain substitution effect on bank credit.

Of course, no matter from our domestic research, online lending has reached a certain amount, but the amount is still very limited, accounting for a small proportion of the entire money supply. However, for equity crowdfunding, I personally feel that it has great room for future development and potential. At present, it is still in a very preliminary stage, but I think if we do a good job in research, planning, or formulating our institutional policies, I personally think that crowdfunding is an area that deserves our attention.

In addition, the credit creation capacity generated by asset securitization means that the regulatory effect of monetary policy on bank credit may be offset by Internet finance, reducing the policy's influence on final consumption and final investment.

Fourth, in terms of the intermediate target of monetary policy, the development of Internet finance will reduce the effectiveness of the intermediate target of traditional monetary policy. Theoretically, an effective intermediate target of monetary policy must meet the three standards of measurability, controllability and relevance. At present, the intermediate target of my country's monetary policy is money supply, which has been maintained for many years. At the same time, referring to the social financing scale index, the development of Internet finance will cause a certain deviation from the three standards of money supply. This is also a matter of great concern from the society. After all, the Internet is a large scale today. What is its stock? What is its future development? The statistical definition standards are inconsistent. This has also attracted great attention from our country, the State Council, the industry, and the academic community. I know that the National Bureau of Statistics, including one bank and three regulatory bodies, are studying the statistical monitoring system of China's Internet finance, how to make the statistical indicators more scientific and more objectively reflect our reality.

From the perspective of measurability, with the development of Internet finance, a large number of innovative products have emerged, and there is also a very significant feature that the conversion between various financial products can be seamlessly connected, and the connection is very fast. I can't keep up with the speed of switching from one to another. It is very complicated, especially under the conditions of asset securitization. It is very complicated, which puts forward new requirements for us. The demand for money and the asset structure are in a complex and changeable state. This is from the perspective of measurability.

From the controllability point of view, Internet money fund products attract customers' funds through higher yields, which directly impacts bank demand deposits. I believe that we all have the most profound experience here, especially our young students, urban people. Generally speaking, people will not put their money in demand deposits, but this is not the case in rural areas, because rural areas have little choice. The knowledge is not enough, the channels are not enough, and the traditional concept of ordinary people is that they are afraid that it is safest to keep money in banks, credit unions, and demand accounts. But it is different in cities. I believe that people with a little knowledge structure in cities have money in Yu'e Bao or other Bao. Every day when they open their mobile phones, the first thing they do is to check what the yield was yesterday, and they are happy to see that they have a few dozen more yuan today. This is the characteristic of urban life.

Therefore, this has a direct impact on bank demand deposits. The rapid expansion of electronic currencies such as Internet payments will reduce the amount of cash in circulation, which is the M0 I just mentioned. This makes the estimation of money circulation velocity and money demand function face more uncertainty.

From the perspective of correlation, some of the current Internet financial industries are outside the scope of supervision and data statistics. I mentioned earlier that you are in me and I am in you, and this boundary is difficult to define. Either there is duplicate counting or statistical omissions. Therefore, some parts are still outside our surveillance. Since the data is uncertain, the correlation between the money supply and the ultimate goals of monetary policy such as price growth, price stability, and economic growth has declined. We need to explore it. If we can explore it through various methods, then our estimate of the money supply will still be at an objective and appropriate level.

In short, China's current monetary policy framework is at a critical stage of transformation. Not long ago, the country formulated the "13th Five-Year Plan". In this plan, it is proposed to improve the monetary policy operation targets, regulatory framework and transmission mechanism, build a target interest rate and interest rate corridor mechanism, and promote the monetary policy from quantity-based to price-based. This is a very complete expression of the country's "13th Five-Year Plan" on monetary policy, and it is also a step forward to a higher level.

To smoothly realize the transformation of the monetary policy framework under the new situation, I think it is necessary to conduct in-depth research on the impact of emerging industries such as Internet finance, and put forward some forward-looking response strategies and policy recommendations. First, we need to improve the monetary policy transmission mechanism and continue to deepen the interest rate marketization reform. The pace of interest rate marketization we have taken in the past two years is not small, but it is not enough. We must continue to move forward, cultivate the benchmark interest rate and yield curve of the market, improve the market-oriented interest rate formation and transmission mechanism, strengthen the macro-control ability based on price regulation, and continue to improve the macro-prudential policy framework and continuously enrich the monetary policy toolbox. We feel that our toolbox is insufficient and the means are limited. What should we do? We still need to enrich our tool types and make different tool combinations according to different periods, different objects and different characteristics. We need to continuously enrich the monetary policy toolbox and enrich the counter-cyclical control means covering Internet finance. We should focus on guiding social expectations and strengthening communication with the public in view of the characteristics of Internet finance. At the same time, emerging financial market players should enhance their independent pricing capabilities and interest rate risk management levels, continuously improve their awareness and acceptance of policy interest rates, and enhance their sensitivity to monetary policy. Generally speaking, traditional financial institutions may react faster, but some of them lack experience in this area and may react more slowly.

Second, we need to optimize the intermediate target of monetary policy. With the development of Internet finance, we should timely adjust the statistical scope of money supply and total social financing to make it more objective and complete, and enhance the measurability and relevance of indicators. On the one hand, we should include relevant financial instruments of Internet finance into the monetary monitoring system based on liquidity standards. On the other hand, we should gradually include Internet financing such as online lending and equity crowdfunding into the statistics of social financing scale. According to the big framework, how can we accurately subdivide it? There is still a lot of arduous work to be done. With the continued advancement of interest rate marketization, the correlation between interest rates and the real economy will increase, and monetary policy can pay more attention to changes in market interest rates.

Third, we need to strengthen the monitoring of Internet finance. The main reason why Internet finance has impacted the effectiveness of monetary policy is that the monitoring of the Internet financial market is not strong enough, and it is not possible to effectively grasp the scale of the Internet financial market and the flow of funds. At present, we feel that the biggest problem in doing statistical monitoring or risk issues of Internet finance is that my personal experience is that there are big problems on the asset side. Of course, the asset side deliberately wants you to see it unclearly and not understand it. Tracking and monitoring the asset side is our shortcoming, and this area should be improved.

Therefore, we should combine the power of the government's statistical departments, regulatory departments and industry associations to incorporate Internet finance into the comprehensive statistical system of the financial industry, so as to effectively grasp the development trend of the market. Whether it is the existing or incremental volume, we must understand it clearly, or have a basic understanding of it.

Fourth, we need to gradually build a target interest rate and interest rate corridor mechanism. The development of Internet finance has reduced the measurability and stability of money demand, and traditional open market operations and quantitative control methods are difficult to adapt. By establishing a target interest rate and interest rate corridor mechanism, it is conducive to financial institutions and economic entities to form stable expectations, reduce market interest rate fluctuations, and effectively avoid bank runs and hoarding of liquidity due to unstable market environment. At the same time, the interest rate corridor can reduce the frequency and intensity of the central bank's open market operations, reduce operating costs, and improve policy transparency.

In summary, as a new thing, Internet finance is still in its early stages of development. It currently accounts for a relatively small proportion of my country's total financial volume, and it is difficult to bring about major structural reforms to the current financial operation mode in the short term. However, in terms of development, we must be foresighted. I think we should pay attention to its future development, its direction, its speed, and its scale.

I believe that there is still a lot of room for research in related theories, and quantitative research still lacks sufficient data mechanisms. In line with the trend of the joint development of the Internet and finance, it is necessary to proactively study the impact of Internet finance on the effectiveness of macroeconomic governance tools of monetary policy. I believe this has very positive significance and research value. Academia and industry should strengthen communication and exchanges, conduct cooperative research, and make scientific, effective, and reasonable systematic response plans to such issues.

Thank you everyone.