(Economic Watch) Three questions about the first RRR cut by the People's Bank of China this year: timing selection, role effect, policy direction

Beijing, March 3 (ZXS) -- China's first RRR cut in 17 has arrived. The People's Bank of China announced on the 2023th that it decided to reduce the deposit reserve ratio of financial institutions by 17.2023 percentage points on March 3, 27 (excluding financial institutions that have implemented a 0% deposit reserve ratio), and after this reduction, the weighted average deposit reserve ratio of financial institutions is about 25.5%.

Why did you choose to reduce the RRR at this time? Looking at the domestic market, the effect of the policy of stabilizing the economy continues to appear, and the overall economic operation shows a trend of stabilization and recovery; Looking at foreign countries, risk events of financial institutions in the United States and Europe are frequent, and the "sequelae" brought about by the "wave of interest rate hikes" in major economies have appeared. This is the background of the People's Bank of China's RRR cut.

Wen Bin, chief economist of Minsheng Bank, said that the current risks of overseas banking industry are increasing, global liquidity is under pressure, and the external development environment is becoming increasingly complex; In the first two months of this year, the main economic indicators showed a positive trend, but the overall recovery foundation is not yet stable, and monetary, fiscal and other policies need to continue to make concerted efforts.

"Therefore, in order to better guide financial institutions to increase support for the real economy, alleviate the pressure of banks lacking long-term money since the beginning of the year, cooperate with fiscal front-loading efforts, and stabilize market expectations, the central bank continues to release medium- and long-term liquidity and boost confidence through RRR reductions while increasing the excessive renewal of MLF (medium-term lending facilities), so as to consolidate the economic stabilization and upward trend and the smooth operation of the banking industry." Wen Bin said.

Regarding the timing of the RRR cut, Zhou Maohua, macro researcher of the financial market department of China Everbright Bank, said that on the one hand, due to the strong expansion of domestic credit in January and February, some banks have tight long-term liquidity, and the central bank has released long-term liquidity through the combination of RRR reduction and structural tools; On the other hand, the domestic economy is in the recovery stage, and the policy should be moderately forward.

What is the effect of this RRR reduction? Pang Ming, chief economist and director of research department of JLL Greater China, told China News Agency that compared with interest rate cuts, RRR cuts can promote financial institutions to be more favorable and effective in supporting the real economy, key areas and weak links, and can supplement liquidity gaps and increase the investment of base currency. In particular, the RRR reduction has the advantage of effectively providing long-term liquidity, reducing the cost of funds for financial institutions and supporting the real economy.

Pang said that based on the deposit data released by the People's Bank of China at the end of February this year, the RRR reduction is expected to release more than 2 billion yuan of medium and long-term liquidity funds.

Liang Si, a researcher at the Bank of China Research Institute, said that financial institutions need medium and long-term liquidity support to release medium and long-term credit, and the liquidity released by the RRR reduction without maturity will help support financial institutions to better release medium and long-term credit to meet the capital needs of enterprises. The liquidity released by the RRR cut will also help ease the regulatory pressure on financial institutions.

What will happen to the policy after the RRR cut? Liang Si bluntly said that the statutory reserve requirement ratio has become a conventional means for the central bank to manage liquidity, and in the case of the overall balance of market liquidity supply and demand, RRR reduction is also a normal operation to regulate liquidity supply and demand, so it does not mean that the orientation of monetary policy has changed.

In addition, since November 2022, the increased volatility of the bond market has led to an increase in the cost of corporate bond issuance, which not only affects the willingness of enterprises to issue bonds, but also affects the unwinding and detachment of money market liquidity to a certain extent, resulting in an increase in the demand for preventive liquidity of financial institutions and an upward shift in the interest rate center of the money market.

Liang Si believes that the RRR reduction will help stabilize the medium- and long-term liquidity needs of financial institutions and promote the gradual return of market operation to stability. The RRR reduction will also help ease the sentiment of the bond market, boost investor confidence, promote the market to return to normal operation as soon as possible, and enhance the momentum of corporate bond issuance and financing.

In Pang Ming's view, after this RRR cut, there is still room and possibility for further RRR reduction of 0.25 to 0.75 percentage points within the year. From the perspective of time, the probability of RRR reduction is relatively high at the time when liquidity is tight in the middle of the year and the peak time when MLF expires in the fourth quarter.

Zhou Maohua believes that the follow-up central bank's RRR reduction and other tools are still in the toolbox, and monetary policy continues to adopt a combination of "aggregate + structure" tools, mainly according to the domestic macroeconomic recovery, price performance and banking system liquidity, camera choices and flexible adjustments. While maintaining the reasonable growth of the total amount of monetary credit, grasp the rhythm of credit delivery, guide financial institutions to optimize the credit structure, increase support for weak links and key emerging areas, and promote the overall improvement of economic operation. (End)