On September 27th, the central bank’s website indicated that the open market 7-day reverse repo operation interest rate was adjusted from the previous 1.70% to 1.50%. Additionally, the central bank reduced the reserve requirement ratio for financial institutions by 0.5 percentage points (excluding financial institutions that have already implemented a 5% reserve requirement ratio). Regarding policy interest rates, Wang Qing, Chief Macro Analyst at Orient Gold Honesty, commented that after this rate cut, the main policy interest rate, which is the central bank’s 7-day reverse repo rate, has been reduced to 1.
5%. Considering the current low price level and the negative GDP deflator on a year-over-year basis, this implies that various actual loan interest rates, after accounting for price factors, remain at historically high levels, suggesting there is still room for policy interest rates to be lowered. In terms of reserve requirements, the team led by Ming Ming, Chief Economist at CITIC Securities, analyzed that this reduction is expected to release 10 trillion yuan in medium and long-term liquidity. Considering the recent acceleration of net financing of local bonds and the pressure it places on commercial banks, along with the structural gap in medium and long-term liquidity behind the substantial net withdrawal of MLF, this reduction may effectively improve the liquidity level in the interbank market. The simultaneous implementation of interest rate cuts and reserve requirement ratio reductions was based on the central bank’s latest announcement. To increase the counter-cyclical adjustment strength of monetary policy and support stable economic growth, from September 27th, the open market 7-day reverse repo operation interest rate was adjusted from the previous 1.70% to 1.50%. The operation interest rates for the open market 14-day reverse repo and temporary positive and reverse repos continue to be determined by adding or subtracting points to the open market 7-day reverse repo operation interest rate, with the addition or subtraction points remaining unchanged. Moreover, the central bank maintains a supportive monetary policy stance, intensifies monetary policy control, and improves the precision of monetary policy control to create a favorable monetary and financial environment for the stable growth and high-quality development of the Chinese economy. The central bank decided: starting from September 27th, 2024, to reduce the reserve requirement ratio for financial institutions by 0. 5 percentage points (excluding financial institutions that have already implemented a 5% reserve requirement ratio). After this reduction, the weighted average reserve requirement ratio for financial institutions is approximately 6.6%. Reporters noted that the Political Bureau of the CPC Central Committee held a meeting on September 26th to analyze and study the current economic situation and to deploy the next steps for economic work. The meeting emphasized the need to increase the counter-cyclical adjustment strength of fiscal and monetary policies, ensure necessary fiscal expenditures, and effectively carry out the ‘three guarantees’ at the grassroots level. It was also emphasized to issue and use ultra-long-term special government bonds and local government special bonds well, to better leverage the driving effect of government investment. It was decided to reduce the reserve requirement ratio and implement a substantial interest rate cut. On the afternoon of September 26th, the central bank convened a video conference across the entire system to study and implement the spirit of the Central Political Bureau’s meeting on September 26th, and to fully promote the recent financial incremental policy measures to take effect as soon as possible.Central Bank Party Secretary and Governor Pan Gongsheng attended the meeting and delivered a speech. The meeting emphasized that the Central Political Bureau meeting conducted a profound analysis of the current economic situation and made clear arrangements for the next economic work. The central bank system needs to act swiftly and with full force to comprehensively implement these measures. Efforts should be accelerated to introduce new financial policy measures and ensure the implementation of each policy. Strengthening inter-departmental coordination is crucial, establishing relevant working groups, and synergizing efforts across the entire system to effectively promote a sustained economic recovery and high-quality financial development.
Previously, on September 24th, at a press conference held by the State Council Information Office, Pan Gongsheng announced the reduction of the reserve requirement ratio and policy interest rates, leading to a decrease in market benchmark interest rates. Specifically, the reserve requirement ratio will be lowered by 0.5 percentage points, providing about 1 trillion yuan in long-term liquidity to the financial market; depending on the market liquidity conditions within this year, there may be a further reduction of the reserve requirement ratio by 0. 25 to 0.5 percentage points at an appropriate time. The central bank’s policy interest rate, namely the 7-day reverse repo operation rate, will be lowered by 0.2 percentage points, from the current 1.7% to 1.5%, while guiding the loan market and deposit rates to move downward in sync, maintaining the stability of commercial banks’ net interest margins. Oriental Jincheng’s Chief Macro Analyst, Wang Qing, pointed out that on September 24th, the central bank also announced that depending on market liquidity conditions within the year, there might be a further reduction of the reserve requirement ratio by 0.25 to 0.5 percentage points, implying that another reserve requirement ratio cut might be implemented before the end of the year, exceeding market expectations. This is likely to support the additional issuance of government bonds, reflecting the coordination and cooperation between macro policies. This indicates that for the coming period, macro policies, including monetary and fiscal policies, will fully exert efforts in the direction of stabilizing growth. Regarding the central bank’s announcement of a 0.2 percentage point reduction in the main policy interest rate, firstly, this is a ‘substantial’ interest rate cut, with the single cut being the largest since 2021; secondly, after this policy interest rate cut, it will lead to a more significant downward movement in various market-based interest rates. It can be observed that on September 25th, the medium-term lending facility (MLF) rate was reduced by 0. 3 percentage points. The central bank expects that this interest rate cut will also lead to a 0.2 to 0.25 percentage point decrease in the loan market (LPR quotes). Subsequently, the average reduction in loan interest rates for enterprises and residents will reach or exceed 0.2 to 0.25 percentage points, with the newly issued residential mortgage loan interest rates seeing a larger decrease. This is key to ‘promoting the stabilization and recovery of the real estate market’ at present.The team of Mingming, the chief economist of CITIC Securities, analyzed that in terms of the reserve requirement ratio (RRR) cut, this announcement mentioned that “the People’s Bank of China adheres to a supportive monetary policy stance, strengthens the intensity of monetary policy regulation, improves the precision of monetary policy regulation, and creates a favorable monetary and financial environment for the stable growth and high-quality development of the Chinese economy”.
Compared with the statement in the RRR cut announcement in February this year, which was “to consolidate and enhance the upward trend of the economic recovery”, the attitude towards the supportive stance of monetary policy is more explicit. This RRR cut is expected to release 1 trillion yuan of medium- and long-term liquidity. Considering the recent acceleration of net local debt financing and the resulting pressure on commercial banks to undertake, combined with the structural gap in medium- and long-term liquidity behind the substantial net withdrawal of medium-term lending facility (MLF), this RRR cut may effectively improve the inter-bank liquidity level. The team of Mingming pointed out that in terms of the interest rate cut, this announcement mentioned that “to strengthen the counter-cyclical adjustment of monetary policy and support the stable growth of the economy”. There is not much difference from the statement in the interest rate cut announcement on July 22, which was “to further strengthen counter-cyclical adjustment and increase the financial support for the real economy”. The 20 basis points interest rate cut this time is expected to guide a relatively large downward adjustment of the LPR quotation in October, further reducing the financing cost of the real economy.
