Guo Qiang: The RRR cut reflects the "me-oriented" attitude of monetary policy

Text | Guo Qiang (Ph.D., working for a large commercial bank in China)

Yesterday, the central bank's website released information showing that in order to support the development of the real economy and promote the stabilization and decline of comprehensive financing costs, the People's Bank of China decided to reduce the reserve requirement ratio of financial institutions by 0.5 percentage points on December 15, 2021 (excluding financial institutions that have implemented a 5% reserve requirement ratio). After this reduction, the weighted average reserve requirement ratio of financial institutions is 8.4%.

Judging from the content of the central bank's answer to reporters' questions, the RRR cut is a routine operation of monetary policy, and some of the funds released will be used by financial institutions to return the expired medium-term lending facility (MLF); the second is to optimize the capital structure of financial institutions, enhance financial service capabilities, and better support the real economy, especially small and micro enterprises; the third is that the RRR cut released a total of about 1.2 trillion yuan of long-term funds.

Just last Friday (December 3), Premier Li Keqiang of the State Council met with the International Monetary Fund Georgieva and said that China will formulate policies around the needs of market players, reduce the RRR in a timely manner, increase support for the real economy, especially small and medium-sized enterprises, and ensure the stable and healthy operation of the economy.

First of all, the speed of the RRR cut does not exceed market expectations. In practice, Premier Li Keqiang generally mentioned that after the timely reduction of the RRR, the People's Bank of China will soon announce the RRR cut, which also reflects the consistency of the policy. On July 7 this year, Premier Li Keqiang presided over the executive meeting of the State Council, which decided that in view of the impact of rising commodity prices on the production and operation of enterprises, on the basis of adhering to the principle of not engaging in flood irrigation, we should maintain the stability of monetary policy, enhance effectiveness, and use monetary policy tools such as RRR reduction in a timely manner to further strengthen financial support for the real economy, especially small and medium-sized enterprises, and promote the stabilization and reduction of comprehensive financing costs. Immediately after July 9, Chinese Min min bank announced that it decided to reduce the reserve requirement ratio of financial institutions by 0.5 percentage points on July 15, 2021. The RRR cut was announced two days after Premier Li Keqiang's speech and is almost in line with the pace of the RRR cut announcement in July. Judging from the performance of the bond market, yesterday's RRR cut should also be fully expected by the market in advance, and the 10-year Treasury yield fell by 5 basis points on the day.

Second, the demand for RRR cuts at the macroeconomic level is increasing. Affected by the spread of the global epidemic, the international commodity prices are running at a high level, and some parts of the country are affected by many factors such as the epidemic and flood conditions, China's GDP growth rate in the third quarter fell back to less than 5%. But this is not an inflection point, in the context of the real estate downturn cycle, the repeated epidemic so that consumption can not be effectively boosted, and the first half of this year to pull the net export of GDP, is likely to have reached a high point, the end of the US epidemic subsidies, resulting in a sharp decline in the income expectations of U.S. residents, consumer confidence has also fallen sharply, Michigan consumer confidence index has fallen to a new low since the epidemic, a sharp decline in consumer demand is likely to lead to China's export weakness, in fact, after the second quarter of this year, China's import and export trade volume has continued to fall from a high level, and the amount of exports has risen sharply year-on-year, mainly due to the sharp rise in the price of goods. These factors may evolve in the later stages in a direction that is not conducive to China's economy. Coupled with the high base of GDP in the first and second quarters of this year, if the economy cannot be effectively stimulated, the growth rate of China's GDP will fall sharply in the first half of next year. The frequent high-level policy signals for stable growth also mean that the marginal easing of monetary policy is becoming more and more necessary.

Third, from the perspective of risk prevention, it also requires relatively loose monetary mitigation. Recently, a number of well-known real estate companies have fallen into debt difficulties, triggering market fluctuations. Under the bottom-line thinking of not having systemic risks, the central government has repeatedly mentioned promoting the stable and healthy development of the real estate industry in November, and constantly releasing positive signals of policy easing. On November 9, the China Association of Interbank Market Dealers held a symposium for representatives of real estate enterprises, and some of the participating real estate enterprises have plans to register and issue debt financing instruments in the interbank market in the near future. However, "housing is not speculated" and "real estate regulation and control long-term mechanism" is still the main tone of the current policy, the relaxation of policy regulation will not be particularly obvious, if the real estate debt problem is not handled properly, it may trigger the risk of credit risk transmission to the urban investment field in the real estate industry, and even lead to the transmission of risk in the upstream and downstream industrial chains of real estate. Therefore, the necessary liquidity support is indispensable when solving the real estate debt problem.

In addition, this RRR cut also reflects the "me-oriented" attitude of monetary policy. During the epidemic period, when there was no bottom line for overseas easing, the People's Bank of China did not follow the easing, strong policy determination, superimposed on a substantial export growth, so that the RMB exchange rate continued to appreciate, and the follow-up policy easing laid a heavy safety cushion. At present, major developed economies are considering or even have begun to gradually withdraw from the context of easing, the People's Bank of China considers the current macroeconomic situation, but has the confidence to start marginal easing, which is a typical embodiment of the flexibility, precision and moderation of the People's Bank of China's monetary policy.

In the later stage, we mainly need to pay attention to the degree of marginal easing of the People's Bank of China. For example, observe whether the central bank's subsequent open market interest rates and MLF operating interest rates will follow the downward revision, pay attention to the policy setting of the upcoming Central Economic Work Conference, and pay attention to whether the economic data in November has fallen more than expected.

(The article represents the views of the author only.) Editor-in-charge email: [email protected]. ）