#Autumn Life Punch Season#In 2023, the People's Bank of China twice reduced the deposit reserve ratio of financial institutions, releasing more than 1 trillion yuan of medium and long-term liquidity, providing sufficient financial support for the economy. In addition, the central bank also flexibly adjusts market liquidity through open market operations and medium-term lending facilities, and maintains a moderately loose, flexible and precise monetary policy. Experts believe that the liquidity management of the central bank is conducive to reducing the financing cost and risk premium of the real economy, alleviating the financial pressure and regulatory assessment of financial institutions, promoting the smooth operation and effective transmission of the financial market, and supporting the economic recovery and high-quality development.
First, the central bank lowered the RRR twice to release more than one trillion yuan of liquidity
2023 is the first year of China's implementation of the 14th Five-Year Plan, and it is also an important year for building a modern socialist country in an all-round way. In the face of the complex and changeable situation at home and abroad, the People's Bank of China adheres to the general tone of seeking progress while maintaining stability, takes supply-side structural reform as the main line, promotes high-quality development as the main body, takes reform and innovation as the driving force, and serves the real economy as the foundation, actively uses monetary policy tools, and maintains reasonable and sufficient liquidity.
On March 27 and September 15, 2023, the PBOC lowered the deposit reserve ratio of financial institutions by 0.25 percentage points (excluding financial institutions that have implemented a 5% reserve requirement ratio), respectively, and is expected to release a total of more than 1 trillion yuan of medium and long-term liquidity. This is the first RRR cut since January 2019 and comes against a backdrop of a positive economic recovery. This shows that the central bank's judgment of the economic situation is objective and rational, and the operation of monetary policy is moderately loose.
The central bank said that the RRR reduction is conducive to increasing the long-term stable funding sources of financial institutions, further increasing capital investment in the real economy, and consolidating the good trend of economic recovery. At the same time, this RRR reduction is also conducive to optimizing the asset and liability structure of banks, improving the efficiency of capital utilization, and reducing bank operating costs. It is estimated that the RRR cut will save banks about 15 billion yuan in interest expenses on deposit reserves per year.
Experts believe that this RRR reduction is in line with the current economic development needs and monetary policy goals. On the one hand, under the influence of factors such as the normalization of epidemic prevention and control, the increase in uncertainty in the external environment, internal structural adjustment and heavy reform tasks, the economy is still facing certain downward pressure and challenges. Therefore, maintaining a moderately loose monetary policy orientation is conducive to stabilizing market expectations and confidence and enhancing the role of domestic demand. On the other hand, under the conditions of moderate inflation, stable exchange rates, and abundant foreign exchange reserves, the release of moderate liquidity will not lead to excessive currency injection or asset bubble formation. On the contrary, it is conducive to balancing the difference in domestic and foreign yields, easing the pressure of RMB appreciation, and maintaining the basic stability of the exchange rate.
Second, the central bank flexibly uses a variety of tools to regulate market liquidity
In addition to the RRR reduction, the PBOC also flexibly adjusts market liquidity through tools such as open market operations, medium-term lending facilities (MLF), standing lending facilities (SLF), and relending to meet the capital needs of different maturity and different entities, and maintain the flexibility and precision of monetary policy.
People's Bank of China announced on its official website that it launched a 106 billion yuan (about US$14.52 billion) open market reverse repurchase operation and a 789 billion yuan (about US$107.96 billion) medium-term lending facility operation on Monday to fully meet the needs of financial institutions, and the one-year winning interest rate remained unchanged at 2.50%. Open market operations are the central bank's main means of regulating short-term liquidity. Since 2023, according to the supply and demand of market funds, the central bank has carried out reverse repurchase, central government bills and other operations in a timely manner to stabilize market interest rate fluctuations and guide money market interest rates to remain at a reasonable level. As of October 17, the central bank has carried out a total of about 9.5 trillion yuan of reverse repurchase operations this year, of which the 7-day reverse repurchase rate has been reduced from 2.2% to 2.0%, and the 14-day reverse repurchase rate has been lowered from 2.35% to 2.15%. The PBOC also issued 100 billion yuan and 50 billion yuan of central government notes in March and September, respectively, providing more investment options for the market.
Medium-term lending facilities are an important tool for central banks to regulate medium- and long-term liquidity. Since 2023, the central bank has carried out a total of 8 MLF operations, with a cumulative investment of about 6.5 trillion yuan, of which the 1-year MLF interest rate has been lowered from 3.15% to 2.95%. MLF operation not only provides banks with a stable source of low-cost funds, but also provides an important reference for the formation mechanism of loan market quotation rate (LPR). In March and April, LPR was lowered by 10 basis points and 20 basis points respectively, reducing financing costs for the real economy.
Standing lending facilities and relending are powerful tools for central banks to address liquidity constraints and support key areas. Since 2023, the PBOC has lowered the SLF interest rate from 3.4% to 3.05%, the relending rate from 2.75% to 2.25%, and expanded the scope of relending targets to include small and medium-sized banks such as rural credit cooperatives, rural commercial banks, urban commercial banks, and non-county rural cooperative banks. By the end of September, the central bank had issued a total of about 1.8 trillion yuan in reloans to support the development of small and micro enterprises, private enterprises, agriculture, poverty alleviation and other fields.
Third, the central bank's liquidity management has achieved positive results
The effect of central banks' continued release of liquidity is already visible. On the one hand, the financing cost of the real economy has decreased significantly. According to statistics, the average interest rate of enterprise loans in the first three quarters was 4.64%, down 0.69 percentage points from the same period last year; the average interest rate of medium and long-term loans for residents was 5.46%, down 0.33 percentage points from the same period last year. On the other hand, the financial pressure of financial institutions has eased significantly. According to statistics, the net interest margin of financial institutions in the first three quarters was 1.97%, an increase of 0.03 percentage points over the same period last year; the growth rate of deposit balances of financial institutions was 8.4%, an increase of 1.6 percentage points over the same period last year.
In addition, central bank liquidity management also helps to promote the smooth operation and efficient transmission of financial markets. On the one hand, the RRR reduction is conducive to enhancing the confidence and expectation of the domestic market for stable economic growth, boosting consumption and investment demand, and expanding the space for domestic demand. On the other hand, the RRR reduction is conducive to maintaining the basic stability of the exchange rate, giving play to the function of the exchange rate adjustment macroeconomy and the automatic stabilizer of the balance of payments, and resisting external shocks and fluctuations.
People's Bank of China an important measure to adjust monetary policy tools in a timely manner according to changes in the economic situation and changes in market demand. These measures fully demonstrate the forward-looking, effective and sustainable nature of the People's Bank of China, and create a good monetary and financial environment for the economic recovery. In the next stage, People's Bank of China will continue to implement a prudent monetary policy, maintain reasonable and sufficient liquidity, maintain reasonable credit growth, better support key areas and weak links, take into account internal and external balance, maintain basic stability of the exchange rate, firmly support the sustained recovery of the real economy, and promote the effective improvement of quality and reasonable growth of the economy.