Room for Reserve Requirement Ratio Cut Remains, While Deposit and Loan Rate Decline Faces Multiple Constraints: Interpreting the Latest Signal of the PBOC's Monetary Policy

Room for Reserve Requirement Ratio Cut Remains, While Deposit and Loan Rate Decline Faces Multiple Constraints: Interpreting the Latest Signal of the PBOC's Monetary PolicyOn September 5th, the State Council Information Office held a press conference where Lu Lei, Deputy Governor of the People's Bank of China (PBOC), Li Hongyan, Deputy Director of the State Administration of Foreign Exchange (SAFE), and other relevant officials from the PBOC and SAFE attended to respond to the latest developments on hot topics such as monetary policy, the foreign exchange market, and digital RMB. This press conference provided an important window for the outside world to interpret the direction of China's monetary policy and conveyed a series of key signals

Room for Reserve Requirement Ratio Cut Remains, While Deposit and Loan Rate Decline Faces Multiple Constraints: Interpreting the Latest Signal of the PBOC's Monetary Policy

On September 5th, the State Council Information Office held a press conference where Lu Lei, Deputy Governor of the People's Bank of China (PBOC), Li Hongyan, Deputy Director of the State Administration of Foreign Exchange (SAFE), and other relevant officials from the PBOC and SAFE attended to respond to the latest developments on hot topics such as monetary policy, the foreign exchange market, and digital RMB. This press conference provided an important window for the outside world to interpret the direction of China's monetary policy and conveyed a series of key signals.

Monetary policy will generally continue to be prudent and will be adjusted flexibly and appropriately based on economic trends. Lu Lei, Deputy Governor of the PBOC, stated that this year, the prudent monetary policy has been flexible, appropriate, and effective, especially in terms of strengthening countercyclical adjustments. The PBOC will continue to adhere to supportive monetary policies, comprehensively utilize various monetary policy tools, maintain ample liquidity, guide banks to enhance the stability and sustainability of loan growth, leverage the driving effect of recent policy interest rate and loan prime rate (LPR) declines, and thereby promote steady declines in corporate financing and household credit costs.

Reserve requirement ratio cuts and interest rate cuts are not "accomplished overnight" and require monitoring of economic trends. Zou Lan, Director of the Monetary Policy Department of the PBOC, pointed out that policy adjustments such as reserve requirement ratio cuts and interest rate cuts require monitoring of economic trends. The impact of the reserve requirement ratio cuts at the beginning of the year is still being felt, and the average statutory deposit reserve ratio of financial institutions is currently about 7%, leaving some room for maneuver. In terms of interest rates, this year, the 1-year and 5-year-plus LPRs have declined by 0.1 and 0.35 percentage points, respectively, leading to a continuous decline in average lending rates. However, it is also important to note that the speed at which bank deposits are flowing to asset management products, the extent to which bank net interest margins are narrowing, and other factors are limiting further declines in deposit and loan rates. The PBOC will closely monitor policy effects, and based on the economic recovery situation, the realization of goals, and specific problems facing macroeconomic operation, it will reasonably grasp the intensity and pace of monetary policy adjustments.

The PBOC is further reforming the monetary policy framework to enhance policy transmission efficiency and precision. In June of this year, Pan Gongsheng, Governor of the PBOC, had outlined his latest thinking on future monetary policy framework reforms at the Lujiazui Forum. In just two months, the PBOC has introduced a series of new reform measures to update China's monetary policy framework. At this press conference, Zou Lan further explained the reform framework and emphasized that the reforms primarily revolve around the following four aspects:

1. Optimizing intermediate variables in monetary policy adjustments. In recent years, China's economic structure has been rapidly transforming, financial markets have been steadily developing, and financing structures have been continuously evolving. These factors have led to a decline in the measurability, controllability, and correlation of the money supply with the economy. The PBOC will gradually de-emphasize its focus on quantitative targets, treating them more as observational, reference, and anticipatory indicators, and will place greater emphasis on the role of interest rates and other price-based regulatory tools. At the same time, in light of changing circumstances, the PBOC will research and improve the statistical scope of the money supply to ensure that monetary statistics better reflect reality.

2. Reforming interest rate regulation mechanisms. Previously, we had many policy interest rates, which sometimes made it difficult for the market to determine a reference point. Currently, the 7-day reverse repo rate in the open market has been clearly identified as the primary policy interest rate, while the policy interest rate nature of the Medium-term Lending Facility (MLF) has been de-emphasized. The 7-day reverse repo has been changed from a rate bidding process to a fixed rate, quantity bidding process, effectively meeting the bidding needs of primary dealers. In the future, we will need to further improve the market-oriented interest rate regulation mechanism, appropriately narrow the width of the interest rate corridor, and better guide market interest rates to operate smoothly around policy interest rates. Furthermore, in terms of interest rate transmission, we will focus on enhancing the quality of LPR quotations, improving the price-setting ability of financial institutions, more accurately reflecting loan market interest rates, and facilitating the smooth transmission of market interest rates from short to long.

3. Continuously enriching the monetary policy toolkit. The PBOC has implemented open market treasury bond trading operations, with the central bank's trading of treasury bonds primarily aimed at managing base money and liquidity. The central bank can both buy and sell treasury bonds and, through flexible coordination with other tools, enhance the scientificity and precision of short-, medium-, and long-term liquidity management. Additionally, the PBOC will innovate and implement structural monetary policy tools in line with macroeconomic conditions and policy adjustment needs, continuously enhancing the efficiency of monetary policy.

4. Further promoting the transmission of monetary policy. Monetary policy transmission essentially occurs in two stages. The first is transmission from the central bank to the financial market, which can be further improved by strengthening policy communication and expectation guidance, increasing the transparency of monetary policy, and enhancing the independent and rational price-setting capabilities of financial institutions, thereby further enhancing the quality and effectiveness of financial services. The second is transmission from the financial market to the real economy. It requires addressing transmission bottlenecks, strengthening coordination between monetary policy and fiscal, industrial, and regulatory policies, promoting supply and demand balance, facilitating a shift in the focus of economic policy towards the areas of improving livelihoods and promoting consumption, enhancing the transmission effect on real economy variables such as consumption and investment, and strengthening the focus of financial services.

The PBOC will increase financial services for technology-oriented enterprises throughout their entire life cycle, focusing on raising the proportion of direct financing, equity financing, and technological innovation loans in total financing. On the day of the press conference, the newly appointed Director of the PBOC's Credit Market Department made his first public appearance before the media. Peng Lifeng, former Deputy Director of the PBOC's Financial Market Department, has been appointed as Director of the Credit Market Department. Addressing the question of how to provide strong financial support for achieving high-level technological self-reliance and self-improvement, Peng Lifeng stated that the PBOC will build a technological financial system that adapts to technological innovation, guiding financial capital to invest early, invest small, invest long-term, and invest in hard technology. Specifically, the PBOC will adopt a combined approach, focusing on:

Firstly, increasing the proportion of direct financing in social financing. Further enriching the financing products of the capital market and establishing special financial bonds for technological innovation. Science and technology innovation notes are issued by technology-oriented enterprises, while special financial bonds for technological innovation are issued by financial institutions, specifically for supporting technology-oriented enterprises, expanding the funding sources of financial institutions, and enhancing the incentive and conversion mechanisms of the financial system to form "patient capital."

Secondly, increasing the proportion of early-stage and small-scale investments in equity financing. Implementing measures to promote the high-quality development of venture capital, perfecting the "investment, financing, management, and exit" mechanism for venture capital, and improving the convenience of foreign capital engaging in equity investment and venture capital in China.

Thirdly, increasing the proportion of technological innovation loans in total loans. Utilizing the technological innovation and technological transformation re-lending mechanism, establishing a performance evaluation mechanism for technological financial services