RRR and interest rate cuts are coming together
Text: Ren Zeping's team
On January 24, Pan Gongsheng, governor of the central bank, said that on January 25, the re-lending and rediscount interest rate for supporting rural and small enterprises will be lowered by 0.25 percentage points, from 2% to 1.75%, and the deposit reserve ratio will be lowered by 0.5 percentage points on February 5 to provide liquidity to the market by 1 trillion yuan.
After 4 months, the market finally ushered in a RRR cut and interest rate cut.
At the same time, the RRR and interest rate cuts were announced to exceed market expectations. The comprehensive RRR cut will release 1 trillion yuan of long-term funds, which is expected to reduce the cost of funds of financial institutions by 15 billion yuan per year;
Recently, the policy has been intensively spoken. The National Standing Committee meeting held on January 22 listened to the report on the operation of the capital market and work considerations, and proposed to take more effective measures to stabilize the market and stabilize confidence. It is necessary to enhance the consistency of macroeconomic policy orientation, strengthen the innovation and coordination of policy tools, consolidate and enhance the positive trend of economic recovery, and promote the steady and healthy development of the capital market.
Recently, the central bank said that "the current macro policy space and room for maneuver are large, and the stable and healthy development of the capital market has a stable foundation." The People's Bank of China will strengthen the counter-cyclical and cross-cyclical adjustment of monetary policy tools, focus on stabilizing the market and confidence, and create a good monetary policy environment for the operation of financial markets, including the capital market." The China Securities Regulatory Commission said that "to build an investor-oriented capital market." ”
Recently, we have advocated "fighting for the economy with all our might", "kicking off a new round of economic stimulus plan", and "starting new infrastructure". As long as we put development in the first place, go all out to fight for the economy, introduce large-scale economic recovery measures with sufficient strength, boost the confidence of the private economy, activate the capital market, promote the soft landing of real estate, and unswervingly focus on economic construction, China's economy is expected to enter the recovery track.
1. Reason: The economy, prices, stock market, and property market all need to be boosted by RRR and interest rate cuts
Economic growth, prices, stock markets, property markets, etc. all need to cut the reserve requirement ratio and interest rates to boost confidence. The manufacturing PMI in December was 49%, which continued to be below the boom and bust line. The CPI was -0.3% year-on-year and the PPI was -2.7% year-on-year, which was negative for three consecutive months, indicating that effective demand was insufficient. In December, the sales area and sales volume of commercial housing were -12.7% and -17.1% year-on-year, respectively, down 2.4 and 8.5 percentage points from November.
According to the law of economics, negative price growth for three consecutive months has pushed up the actual financing costs of enterprises, and the necessity of cutting interest rates and reserve requirements has risen. A very important role of interest rate cuts is to reduce the burden of residents, enterprises, and local debts. It is necessary not only to lower the interest rate on new loans, but also to reduce the interest rate on stocks, so that the debt burden will be reduced, and residents will be willing to consume and enterprises will be willing to invest. In the future, we can consider reducing the interest rate on the stock of the second home, reduce the burden of interest expenses on residents, and then reduce the cost of debt for banks through RRR cuts. In this way, the vitality of consumption and investment is expected to be unleashed.
At the beginning of the year, there was a large funding gap, and the credit and fiscal efforts needed to be supported by loose liquidity. Although the interbank capital is relatively stable, the peak of capital demand is coming. First, the fiscal force, the early approval of special bonds in 2024 is ready to be issued, which will cause disruption to market liquidity; the second is that bank credit is off to a good start, and credit will consume reserves, and the third is that MLF is due at 481 billion yuan in February and 499 billion yuan in March, and the MLF balance has risen rapidly by more than 7 trillion yuan, all of which need liquidity support. At this time, the RRR cut will stabilize the market's expectations for long-term capital investment, ease the pressure on the capital side, and consolidate the economic recovery momentum.
Prices have slowed, exchange rate pressures have eased, and constraints on monetary policy have eased. Lower prices have opened up room for RRR and interest rate cuts. The Fed's interest rate cut expectations have risen, and the RMB exchange rate has risen, and the onshore RMB exchange rate has risen above the 7.17 mark. The RRR and interest rate cuts will consolidate the economic recovery, and the RMB exchange rate will continue to stabilize at a reasonable and balanced level.
2. Method: Comprehensively reduce the reserve requirement ratio and targeted interest rates, release trillions of long-term funds, and reduce the cost of bank liabilities
Judging from the form of the announcement, compared with the previous announcement, this is the first time that the RRR and interest rate cuts were directly announced by the governor of the central bank at the press conference. It shows that the monetary authorities directly send easing signals to the market, improve communication efficiency and transparency, and boost market confidence.
From the perspective of methods, the two-pronged RRR and interest rate cuts this time are more intensive, and the easing signal is clearer, and the targeted interest rate cut also indicates the attitude of reducing financing costs, which is conducive to guiding market expectations.
In terms of volume, the RRR cut of 0.5 percentage points this time is a change from the 0.25 percentage point cut since 2022, which is more than expected, and it is expected to release 1 trillion yuan of long-term funds, which can meet the demand for funds.
From a price point of view, the RRR cut is expected to reduce the capital cost of financial institutions by 15 billion yuan per year, alleviate the pressure on banks' liabilities and net interest margins, and help enhance banks' ability to support the real economy and mitigate risks.
From the perspective of the landing interval, the RRR cut was 12 days ahead of schedule from the announcement to the official implementation, reflecting the acceleration of confidence.
Targeted interest rate cuts, mainly concerned about exchange rate and interest rate spread constraints, and weak links. After two years, the central bank once again lowered the re-lending and rediscount interest rates for supporting agriculture and small enterprises by 0.25 percentage points. As of September 2023, the scale of the above three tools is about 2.69 trillion yuan, accounting for 38% of the central bank's structural tools, and the impact of targeted interest rate cuts is relatively limited.
3. Impact: Release liquidity, alleviate the pressure on the debt side of banks, reduce the financing cost of the real economy, and benefit the stock market, bond market, and housing market
Release a signal of steady growth and stable expectations. The RRR and interest rate cuts release low-cost liquidity, which is conducive to guiding financial institutions to increase credit supply, guide the reduction of comprehensive social financing costs, boost corporate investment, stimulate household consumption, and is expected to drive price improvement and facilitate the restoration of social expectations.
Alleviate the pressure on the liability side of banks, prevent and resolve financial risks. As of the third quarter of 2023, the net interest margin of commercial banks was only 1.73%, below the warning line for three consecutive quarters. The RRR cut can release a large amount of zero-cost liquidity, alleviate the pressure on the liability side of banks, maintain the stable operation of commercial banks, enhance the sustainability of commercial banks to support the real economy, and prevent financial risks.
Reduce the financing cost of the real economy. The RRR cut provides low-cost long-term funds for financial institutions, which is conducive to financial institutions to increase credit supply, and interest rate cuts can lead to a decrease in social financing costs. The RRR and interest rate cuts are conducive to reducing the comprehensive financing cost of the real economy, improving financing demand, and promoting economic recovery. In addition, the RRR and interest rate cuts released a signal of stable growth, which also helped boost market confidence.
RRR and interest rate cuts boosted stock market confidence. The stock market is a barometer of money, and this RRR and interest rate cut will release a lot of liquidity and guide the reduction of financing costs, which is conducive to boosting corporate earnings expectations and corporate valuations. In line with the recent policies advocated by the China Securities Regulatory Commission to build an investor-oriented capital market and accelerate the improvement of the institutional mechanism for investor protection, it can effectively boost investor confidence and increase investment willingness.
Short-term boost to the bond market. The RRR and interest rate cuts are conducive to making up for the liquidity gap of banks, improving the pressure on the capital side, releasing a loose monetary signal, and boosting the confidence of the bond market. The short-term bond interest rate will be driven down, and the main line of the medium- and long-term bond market still depends on the economic fundamentals and the real estate recovery process.
Help the real estate market to land steadily. The RRR cut further released a positive signal to stabilize the real estate, which is conducive to reducing the financing difficulty of real estate enterprises and boosting the confidence of home buyers. At the same time, the RRR and interest rate cuts to promote macroeconomic stability and improvement are conducive to driving the expected improvement of the real estate market, and a series of property market combinations such as the recent financing policies for real estate enterprises and the acceleration of the construction of the three major projects are conducive to the stabilization of the real estate market.
The RMB exchange rate continued to rise. In the short term, the Fed's interest rate cut expectations have risen, and the external pressure on the depreciation of the RMB has eased. In the long run, the RMB exchange rate is fundamentally dependent on economic fundamentals, and the combination of macro policies has helped China's economic expectations improve, and the RMB exchange rate has been strong for a long time.
4. Outlook: The policy toolbox is open, and interest rate cuts will eventually come
Looking ahead, monetary policy will remain prudent, in line with fiscal policy, and efforts will be made to stabilize growth. The Central Economic Work Conference mentioned that a prudent monetary policy should be flexible, moderate, precise and effective, and that liquidity should be reasonable and abundant. Recently, the governor of the central bank said at the press conference of the State Council Information Office that it is necessary to strengthen macroeconomic regulation and control, strengthen counter-cyclical and cross-cyclical adjustment, consolidate and enhance the positive trend of economic recovery, and continue to promote high-quality economic development.
In terms of aggregate liquidity, we will maintain reasonable and sufficient liquidity, and continue to make comprehensive use of tools such as the reserve requirement ratio, re-lending and re-discounting, and open market operations to maintain a reasonable growth in liquidity and provide a suitable monetary environment for stable growth.
The current price level is low, the Federal Reserve's monetary policy has shifted, and the mainland's monetary policy operation space has expanded.
In terms of structure, we should pay attention to improving efficiency, and pay more attention to handling the relationship between aggregate and structure, stock and increment, and revitalize the inefficient occupation of financial resources. We will continue to increase support for major strategies, key areas and weak links. Make good use of structural monetary policy tools such as special re-lending and re-discounting to promote scientific and technological innovation, private small and micro enterprises, advanced manufacturing, green development and inclusive pension.
In the future, the monetary policy toolbox includes: 1) reducing the reserve requirement ratio and interest rates, continuing the MLF, and increasing public reverse repo operations to maintain reasonable and sufficient liquidity; 2) giving full play to the important role of the market-oriented adjustment mechanism of deposit interest rates to promote the reduction of corporate financing and personal credit costs; 3) re-lending, re-discounting and other structural monetary policy tools, and increasing support for key areas and weak links of the national economy such as inclusive finance, green development, scientific and technological innovation, and infrastructure construction. 4) Emergency liquidity financial instruments to help local governments mitigate debt risks. 5) In addition to PSL, make good use of policy-based development financial instruments and special loan tools, focus on infrastructure projects, and support the construction of the "three major projects" of urban villages, affordable housing, and dual-use projects. 6) If necessary, the central bank can create new structural tools to provide liquidity support.