Compared with the deposit reserve ratio of other developing economies, the current level of domestic deposit reserve ratio is not high, indicating that the space for domestic RRR reduction is shrinking in the future. However, according to the changes of domestic economic situation and the needs of counter cyclical regulation, there is still the possibility of further reduction.
“This is a restrained RRR reduction, only 25bp.” Said the fixed income investment director of large public funds in Beijing.
On the evening of April 15, the central bank announced that in order to support the development of the real economy and promote the steady decline of comprehensive financing costs, the people’s Bank of China decided to reduce the deposit reserve ratio of financial institutions by 0.25 percentage points on April 25, 2022 (excluding financial institutions that have implemented the deposit reserve ratio of 5%). In order to increase the support for small and micro enterprises and “agriculture, rural areas and farmers”, for urban commercial banks without inter provincial operation and agricultural commercial banks with deposit reserve ratio higher than 5%, an additional 0.25 percentage point will be reduced on the basis of reducing the deposit reserve ratio by 0.25 percentage point.
According to the 21st Century Business Herald reporter, this RRR reduction is relatively special: since 2018, the central bank’s previous RRR reductions have mostly been 50bp or 100bp or more, and this time only 25bp, indicating the central bank’s intention to cherish the space of monetary policy. In addition, the overnight interest rate has recently been reduced to about 1.3%, which shows that the market is abundant in liquidity - against this background, the decline must be a measure to deal with the downward pressure of the economy, the impact of the epidemic, and take into account the internal and external balance. Looking ahead, China’s monetary policy is dominated by China, and there is still the possibility of reducing reserve requirements and interest rates in the future.
Wu chaoming, vice president of Caixin Research Institute, said that there is a certain time lag in the support of RRR reduction to the real economy, but it can have an immediate effect on the stability and boost of market expectations. First, it has strengthened the expectation of stable growth of policies and superimposed the fine-tuning of other regulatory policies, which will reverse the pessimistic expectation of the market for economic growth to a certain extent and boost the investment of enterprises and the Consumption Willingness of residents. Second, form a joint force with other counter cyclical policies to improve the risk appetite of investors in the capital market and help the virtuous cycle of the capital market and the real economy from the two aspects of improving enterprise profit expectations and boosting valuation.
Cherish the space of monetary policy
“This RRR reduction is lower than the market expectation, which may be due to the low deposit rate. Considering the policy space, the reduction range is narrowed each time.” Wang Qing, chief Macro Analyst of Dongfang Jincheng, said.
According to the 21st Century Business Herald reporter, the discussion on monetary policy space is mainly that after Yi Gang took over as governor of the central bank, he first talked about this issue in his speech and Q & A at the G30 international banking seminar in October 2018. The background is that China’s economy is facing new downward pressure, and the market is concerned about how to deal with monetary policy.
In September 2019, Yi Gang said at the press conference of the State Council Information Office that in the whole process of monetary policy operation, we cherish the space of normal monetary policy, so that we can continue normal monetary policy as long as possible in this space of normal monetary policy, which is beneficial to the sustainable development of the whole economy and the well-being of the people.
According to the speeches of central bank officials, the space of monetary policy points to the two important aggregate tools of statutory deposit reserve ratio and interest rate, and points to the space for downward adjustment. In terms of interest rate, this space refers to the distance between policy interest rate and zero interest rate. When the interest rate reaches zero, the traditional monetary policy transmission mechanism will fail, and the central bank will be forced to enter QE.
In terms of the interest rate space of the deposit reserve ratio, it is mainly compared with the history and international comparison, and the factor of excess deposit reserve ratio is also taken into account. When Yi Gang took over as governor of the central bank, the statutory deposit reserve ratio of small, medium-sized and large financial institutions was 14% and 16% respectively. Before the reduction, it was 8.5% and 11.5% respectively (considering the targeted reduction of Inclusive Finance, it may be reduced by about 2 percentage points), and it was reduced by 5.5% and 4.5 percentage points respectively in more than four years (there was no increase during the period).
Liu Guoqiang, vice governor of the central bank, said again at the press conference of the state information office in January this year that the current average deposit reserve ratio of financial institutions is 8.4%, which is not high. It should be said that the level of deposit reserve ratio is not high compared with other developing economies or the deposit reserve ratio in our history, and the space for further adjustment is smaller. However, from another perspective, the space has become smaller, but there is still a certain space, which can be used according to the economic and financial operation and the needs of macro-control.
Central bank data show that the weighted average deposit reserve ratio before the RRR reduction was 8.4%, which is still far from the record low of 6%. In the last three RRR reductions, institutions with a deposit rate of 5% are no longer included, so to some extent, 5% can be regarded as the bottom line of the current legal deposit rate. Considering that the deposit reserve ratio of more than 4000 small and medium-sized banks has been reduced to 5%, the room for reduction may be mainly in large state-owned banks, joint-stock banks, some urban commercial banks and rural commercial banks.
The relevant person in charge of the people’s Bank of China said that the RRR reduction is a comprehensive one. Except for some legal person financial institutions that have implemented the 5% deposit reserve ratio, other financial institutions have generally reduced the deposit reserve ratio by 0.25 percentage points. For urban commercial banks without inter provincial operation and rural commercial banks with a deposit reserve ratio higher than 5%, on the basis of reducing the deposit reserve ratio by 0.25 percentage points, an additional 0.25 percentage points will be reduced, which will help to increase support for small and micro enterprises and “agriculture, rural areas and farmers”.
According to the disclosure of the central bank, after the reduction, the weighted average deposit reserve ratio of financial institutions is 8.1%, only 310bp from 5%.
Wu chaoming said that at present, the average deposit reserve ratio of financial institutions is 8.1%, which is nearly 7 percentage points lower than that in early 2018 and more than 2 percentage points lower than that before the epidemic. The overall reserve ratio level is not high. In addition, compared with the deposit reserve ratio of other developing economies, the current level of domestic deposit reserve ratio is not high, indicating that the space for domestic RRR reduction is shrinking in the future. However, according to the changes of domestic economic situation and the needs of counter cyclical regulation, there is still the possibility of further reduction.
Why is the standard lowered?
“Today, the overnight interest rate is only 1.3%. From the perspective of market liquidity, there is no need to reduce the reserve requirement.” The aforementioned director of fixed income investment of large public funds in Beijing said.
According to wind data, dr001 was 1.34% on April 15, down from the previous day