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pan gongsheng, governor of the people's bank of china, said at a press conference held by the state information office on september 24 that the deposit reserve ratio will be lowered by 0.5 percentage points in the near future.

unleashing trillions of liquidity

it is worth noting that this is the second reserve requirement cut this year, which will provide about 1 trillion yuan of long-term liquidity to the financial market.

pan gongsheng also said that the deposit reserve ratio may be further lowered this year depending on market liquidity conditions.

prior to this, according to zepin macroeconomic statistics, since april 2022, my country has implemented five comprehensive reserve requirement cuts, releasing about 3 trillion yuan of long-term funds.

image source: screenshot of zeping macro wechat official account

influenced by this news, the interest rate of active 10-year treasury bonds in the interbank market fell to 2% in the morning, and the interest rate of active 30-year treasury bonds fell to 2.1%.

image source: qeubee

already expected

it is worth mentioning that the industry had long anticipated the central bank’s reserve requirement ratio cut.

on september 5, zou lan, director of the monetary policy department of the people's bank of china, said at a press conference that the current average statutory reserve ratio of financial institutions is about 7%, and there is still some room.

the huajin macro research team interpreted that the relevant person in charge of the people's bank of china also clearly mentioned recently that "deposit and loan interest rates still face certain constraints if they are further downward", implying that there is no room for further interest rate cuts, but the average statutory reserve ratio "still has some room", which has been clearly predicted since the beginning of the year, and the forecast of a 50bp cut in the reserve ratio in september is maintained.

the agency analyzed that "liquidity injection was already tight in september last year. september this year is the reasonable time to cut the reserve requirement ratio as we have clearly expected since the beginning of the year. we maintain the forecast of a 50bp reduction in the reserve requirement ratio to maintain a reasonable level of credit financing demand protection and avoid a short-term surge in money market interest rates."

dagong international pointed out that the rrr cut can provide more funds for banks, so that banks have more sources of funds to support the issuance and use of government bonds, which will help speed up the issuance and use of local government special bonds, form more physical workload, and thus support the positive fiscal policy to work better. in terms of the current overall macro environment, measures to support the issuance of government bonds and reduce bank liability costs are expected to be implemented.

the macro research team of zheshang securities said that by lowering the reserve requirement ratio, banks can reduce their funding costs, thereby affecting the lpr and continuing to transmit it to the real economy. the agency pointed out that if the central bank lowers the reserve requirement ratio, from the perspective of the "market interest rate + central bank guidance → lpr → loan interest rate" mechanism, it may lead to a 25bp drop in the lpr for both 1 year and 5 years or more. the reason for the large magnitude is that its current pricing may be overestimated. in recent years, the proportion of "point reduction" of general loans in my country on the basis of lpr quotation has been increasing. in june this year, the proportion of general loans with interest rates higher than lpr was 49.55%, the proportion of loans with interest rates equal to lpr was 6.16%, and the proportion of loans with interest rates lower than lpr was 44.29%. the proportion of "point reduction" pricing has increased by nearly 4 percentage points from 40.44% in march. this figure was only 15.55% in august 2019, the month of lpr reform. if the lpr falls again, it may continue to drive adjustments to bank deposit interest rate pricing.

how will it affect the market outlook?

according to statistics from the investment advisory team of china asset management, since 2014, the 1y treasury bond interest rate has fallen by an average of 3.5bp/3.8bp on the second day and fifth day after the central bank announced a reserve requirement ratio cut, and the 10y treasury bond interest rate has fallen by an average of 0.6bp/0.5bp.

the market interest rate and bond price have an inverse relationship. when the interest rate rises, the bond price falls; conversely, when the interest rate falls, the bond price rises.

overall, the reserve requirement ratio cut is good for the bond market as a whole. specifically speaking, short-term interest rates are more sensitive to changes in monetary policy and liquidity, while long-term interest rates more reflect expectations about economic fundamentals. therefore, if the reserve requirement ratio cut is implemented in the future, it may be more cost-effective to choose short-term bonds.

image source: fuguoxing investment consulting

how much impact does the rrr cut have on the a-share market? overall, the shanghai and shenzhen indices have risen more than they have fallen.

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