On September 24, at a press conference held by the State Council Information Office, People's Bank of China (PBOC) Governor Pan Gongsheng announced several significant updates.
Regarding the reserve requirement ratio (RRR) cut, Pan declared that the RRR would be reduced by 0.5 percentage points in the near term, injecting approximately 1 trillion yuan of long-term liquidity into the financial market.
Depending on the market's liquidity conditions, there may be a further reduction of the RRR by 0.25 to 0.5 percentage points before the end of this year.
As for the interest rate cut, the central bank's policy interest rates will be lowered, with the 7-day reverse repo operation rate being reduced by 0.2 percentage points from the current 1.7% to 1.5%.
This is aimed at guiding the Loan Prime Rate (LPR) and deposit rates to move downward in tandem, maintaining the stability of commercial banks' net interest margins.
Dong Ximiao, Chief Researcher at China United Network Communications, told Yicai that policies such as RRR and interest rate cuts can help reduce the funding costs for financial institutions, encourage them to lower actual lending rates, promote a stable and declining trend in the comprehensive financing costs of society, reduce interest expenses for businesses and individuals, and stimulate effective financing demand.
The RRR cut is twice the conventional amount.
In February 2024, the PBOC reduced the RRR by 0.5 percentage points, and now it is planned to cut it again by 0.5 percentage points.
Currently, the weighted average RRR for financial institutions is 7%, with large commercial banks reducing from the current 8.5% to 8%, and medium-sized banks from the current 6.5% to 6%; rural financial institutions and others that have already implemented a 5% RRR will not be further reduced.
"Lowering the RRR and policy interest rates will effectively reduce the funding costs for financial institutions," said Dong Ximiao.
China's current weighted average RRR is about 7%, and there is indeed room for further cuts.
This comprehensive RRR cut of 0.5 percentage points is the second time this year, following the comprehensive RRR cut of 0.5 percentage points in February.
Generally, the RRR cut is 0.25 percentage points (both cuts in 2023 were 0.25 percentage points), and this cut is 0.5 percentage points, which is twice the conventional RRR cut amount.
Wen Bin, Chief Economist at China Minsheng Bank, stated that in terms of quantity, the central bank announced a reduction of the RRR by 0.5 percentage points, providing 1 trillion yuan of long-term liquidity, with a possible further reduction of 0.25 to 0.5 percentage points depending on market liquidity conditions, potentially releasing up to 2 trillion yuan of liquidity and reducing bank liability costs by about 8 billion yuan.
After the RRR cut, the average RRR for the banking industry is about 6.6%, which still has some room compared to the central banks of major economies internationally, and there may be a further reduction of 0.25 to 0.5 percentage points depending on liquidity conditions before the end of the year.
In the market's view, this RRR cut is significant, as it not only includes "a reduction of the RRR by 0.5 percentage points in the near term" but also announces that "depending on market liquidity conditions, there may be a further reduction of the RRR by 0.25 to 0.5 percentage points before the end of this year," which exceeds the market's general expectations.
Wang Qing, Chief Macro Analyst at Orient Gold & Credit, believes that the current peak period for government bond issuance can be strongly supported by the central bank's RRR cut.
At the same time, the central bank's significant RRR cut will also support banks in increasing credit supply in the fourth quarter.
This is expected to reverse the situation of a significant year-on-year increase in new RMB loans from January to August and is an important point of effort for current economic stability.
Finally, it is expected that fiscal policy in the fourth quarter will play a counter-cyclical regulatory role through the issuance of additional government bonds and other means.
Wang Qing believes that this may be one of the reasons for the central bank's announcement that there may be a further reduction of the RRR by 0.25 to 0.5 percentage points before the end of the year.
The impact of the interest rate cut on banks' net interest margins is neutral.
In addition to the RRR cut, the central bank also announced plans to reduce the 7-day reverse repo operation rate from the current 1.7% to 1.5%, a cut of 20 basis points, guiding the Loan Prime Rate and deposit rates to move downward in tandem, maintaining the stability of commercial banks' net interest margins.
In July, the central bank had reduced the 7-day reverse repo operation rate from 1.8% to 1.7%, and now it is further reduced to 1.5%.
Under the market-oriented interest rate control mechanism, policy interest rate adjustments drive adjustments in various market benchmark interest rates.
It is expected that this policy interest rate adjustment will lead to a 0.3 percentage point reduction in the Medium-term Lending Facility (MLF) rate, and the expected Loan Prime Rate (LPR), deposit rates, etc., will also move downward by 0.2 to 0.25 percentage points.
According to the central bank's estimates, the impact of this interest rate adjustment on banks' net interest margins is overall neutral.
Industry expectations are that the LPR and deposit rates will move downward symmetrically.
The effects of the previous rounds of central bank-guided deposit rate cuts are also gradually accumulating and becoming apparent.
After considering all policies, the net interest margin can remain stable.
Wang Qing believes that the central bank's announcement of interest rate cuts and RRR cuts will play an important role in boosting the overall demand of the macroeconomy.
On the one hand, the reduction in financing costs will directly stimulate consumption and investment demand, effectively playing a counter-cyclical regulatory role and promoting an improvement in economic growth momentum; at the same time, this will also alleviate the current macroeconomic situation of "strong supply and weak demand," promoting a moderate rebound in price levels.
On the other hand, after the central bank's policy combination, it will effectively boost market confidence and improve social expectations.
At this stage, this is of great significance for stabilizing growth and the real estate market, and achieving the "around 5.0%" economic growth target set at the beginning of the year.
Liang Si, a researcher at the Bank of China Research Institute, believes that the 7-day reverse repo rate is a policy interest rate and the central axis of the interest rate system.
Its reduction means that the subsequent LPR is expected to be reduced synchronously, and the credit interest rates linked to the LPR will also move downward synchronously, further reducing corporate financing costs and the burden of residents' home purchases.
Looking at internal demand, this year's financial data has been relatively weak overall, with residents' willingness to leverage relatively weak, and actual interest rates remaining relatively high in an environment of low inflation readings.
A significant interest rate cut will help to strengthen the counter-cyclical regulatory effort.
Ming Ming, Chief Economist at CITIC Securities, stated that looking at the external environment, after the Federal Reserve's interest rate cut, the interest rate differential between China and the United States is gradually narrowing, and the overall strengthening of the RMB exchange rate has eased the constraints on a loose monetary policy for the purpose of stabilizing the exchange rate, and there is more room for China to cut interest rates.
As the market's expectations for the Federal Reserve's interest rate cut have intensified and materialized, since August, the US dollar index has continued to fall, down by 3%, easing the depreciation pressure on non-US currencies, and the situation of the RMB exchange rate facing significant depreciation pressure has also been reversed.
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