On September 24th, the People's Bank of China announced a series of monetary policy adjustments and optimization measures, including changes to the reserve requirement ratio, deposit and loan interest rates, and the innovation of policy tools. These measures are comprehensive and significant in scope. Overall, these policy measures send a strong signal, which will effectively boost the confidence of market entities, stabilize expectations, guide finance to increase support for the real economy, consolidate the upward trend of the economy, and strive to achieve the annual economic and social development goals and tasks. In the next phase, as the Federal Reserve enters a rate-cutting cycle, the external constraints on China's monetary policy will decrease, and there is still room and possibility to increase the implementation intensity.

Firstly, reducing the reserve requirement ratio and policy interest rates will effectively lower the funding costs for financial institutions. Currently, China's weighted average reserve requirement ratio is about 7%, and there is indeed room for a reduction. The comprehensive reduction of 0.5 percentage points announced this time is the second reduction within the year following the comprehensive reduction in February. This reduction is twice the conventional reduction amplitude and will release about 1 trillion yuan of liquidity to the market, saving financial institutions 12 billion yuan in funding costs annually. However, county-level rural financial institutions have already implemented a 5% reserve requirement ratio and are not within the scope of this reduction. The central bank also stated that depending on market liquidity conditions within this year, it will choose the right time to reduce the reserve requirement ratio by 0.25 to 0.5 percentage points. This indicates that if factors such as a large issuance of government bonds affect liquidity, the central bank may implement a third reduction within the year, providing a reassurance to the market.

Advertisement

At the same time, the central bank reduced the 7-day reverse repo operation interest rate from the current 1.7% to 1.5%, a decrease of 20 basis points, which exceeds expectations. On September 25th, the 1-year Medium-Term Lending Facility (MLF) operation interest rate was reduced from 2.3% to 2.0%, a decrease of 30 basis points. The 7-day reverse repo operation interest rate is the main policy interest rate, and it is expected that the Loan Prime Rate (LPR) will decrease by 20 basis points in sync, thereby significantly reducing the interest rates on existing and new loans. It should be said that this policy of reducing reserves and interest rates is resolute and strong, which will lower the funding costs for financial institutions, promote financial institutions to reduce the actual interest rates on loans, promote the comprehensive financing costs in society to continue to decline at a low level, reduce the interest expenditure pressure on enterprises and individuals, and thereby stimulate effective financing demand.

Secondly, reducing the interest rates on existing housing loans and the minimum down payment ratio for second套房 loans will stimulate housing consumption demand from the demand side. Real estate is of great significance to the recovery and rebound of the economy. Since the second half of 2021, China's real estate market has undergone significant adjustments, and there have been major changes in the supply and demand relationship of real estate. After the "Four Arrows" on May 17th, the central bank promoted commercial banks to集中ly reduce the interest rates on existing housing loans by about 50 basis points, which helps to reduce the interest expenditure pressure on existing housing loan borrowers and may be conducive to stabilizing residents' consumption expectations and reducing the phenomenon of early repayment of housing loans. However, this move will break through the policy of managing the lower limits of housing loan interest rates at that time, and how to maintain the seriousness of the policy should be properly considered.

Reducing the minimum down payment ratio for second套房 loans at the national level from the current 25% to 15%, which is the lowest down payment ratio in history, will better meet the needs of residents for improved housing. If the LPR decreases by 20 basis points in the next step, the interest rates on existing and new housing loans will further decrease, and the burden on housing consumers will be greatly reduced. At the same time, the central bank's support ratio for affordable housing re-lending is increased from 60% to 100%, and the policy term for commercial property loans and the "Financial 16 Articles" is extended to the end of 2026. This will help to increase the enthusiasm of commercial banks and local governments to apply and use, and accelerate the process of de-stocking commercial housing. Real estate depends on finance in the short term and population in the long term. The adjustment of real estate financial policies, especially housing credit policies, will help the real estate market return to normal, stabilize residents' confidence in housing consumption, and improve residents' willingness and ability to consume housing.

Thirdly, creating new structural monetary policy tools will better support the stable development of the stock market. Currently, there are 18 structural monetary policy tools in China, mainly used to support key areas and weak links such as private and small and micro enterprises, scientific and technological innovation, and green development. The creation of swap facilities for securities, funds, and insurance companies, and special re-lending for stock buybacks and increases, which are mainly used to support the development of the stock market, is the first time in history.

Swap facilities support qualified securities, funds, and insurance companies to use assets such as bonds, stock ETFs, and constituents of the CSI 300 as collateral to exchange for high-liquidity assets such as national debt and central bank bills from the central bank; while repurchase and increase re-lending support and guide commercial banks to provide loans to listed companies and major shareholders for the repurchase and increase of listed company stocks. The first phase of these two policy tools is 500 billion yuan and 300 billion yuan, respectively. If necessary, the central bank will continue to add funds to support. This fully reflects the importance and support of monetary policy for the stability and development of the capital market, which will further increase the liquidity of the stock market, stabilize investor confidence, and promote the stock market to regain vitality and vitality.

It should be noted that after the concentrated reduction of existing housing loan interest rates in September 2023, it will be inevitable to affect commercial banks, especially large commercial banks with a high proportion of housing loans, when the existing housing loan interest rates are concentrated again in 2024. According to the calculation of the Research Institute of the Bank of China, if the existing housing loan interest rate is reduced by 50 basis points, it will lead to a decrease in the bank's net interest margin by 7 basis points, a decrease in operating income by 3%, and a decrease in net profit by 6%. Moreover, after the LPR decreases, the interest rates on existing and new housing loans will also decrease accordingly. However, since this year, with the continuous reduction of deposit interest rates and the effect of policies such as rectifying "manual interest supplementation," the funding costs of banks have been reduced to some extent. Today, the central bank announced the reduction of reserves and interest rates, as well as the promotion of the continued decline of deposit interest rates, which will further reduce bank costs. Therefore, the concentrated reduction of existing housing loan interest rates this time will have a limited impact on banks as a whole, and the interest margin is expected to remain basically stable.

It should be said that the concentrated reduction of existing housing loan interest rates is a special policy implemented in a special period and should not be normalized and implemented frequently. It is expected that this concentrated reduction of existing housing loan interest rates will be the last time. In the next phase, strict adherence to marketization and legalization principles should be maintained, and the spirit of contract should be better cultivated, with commercial banks and borrowers independently negotiating to determine housing loan interest rates. Financial regulatory authorities should adhere to their duty boundaries, firmly follow the direction of interest rate marketization, and should not excessively interfere with the independent management rights of commercial banks, nor should they directly intervene in the specific process of loan pricing. Faced with the pressure of narrowing interest margins and profits, commercial banks should be based on their own endowments and comparative advantages, optimize the allocation of financial resources, and do a good job in "five major articles" to strive to explore new growth points, increase net interest income through the way of "quantity for price" and vigorously develop intermediate businesses, and improve the ability to develop steadily and serve the real economy effectively.