Source: Securities Times.
Author: He Jueyuan People's Bank of China (referred to as the "Central Bank") and the State Administration of Foreign Exchange (referred to as the "Foreign Exchange Bureau") officials have stated that gold reserves have always been an important part of the diversification of international reserves in various countries. Most central banks' international reserves contain gold, including China. Gold, as a special asset, has multiple attributes of finance and commodities. Along with other assets, it helps adjust and optimize the overall risk-return characteristics of international reserve portfolios.

On September 24, the Governor of the People's Bank of China, Pan Gongsheng, announced a series of incremental monetary policies at a press conference at the State Council Information Office, including: lowering the reserve requirement ratio and policy rates, driving the market benchmark interest rates down; reducing outstanding mortgage rates, and standardizing the minimum down payment ratio for mortgages; creating new monetary policy tools to support the stable development of the stock market.

According to sources close to the central bank, the establishment of new tools by the central bank aims to stabilize the stock market and boost confidence. The new tools fully demonstrate the intensification of macroeconomic regulation and the enhancement of macroeconomic policy coordination. Convenient swaps are not direct cash injections and will not expand the base money supply.

In considering reserve cuts and interest rate reduction policies, the central bank's total incremental policy tools take into account supporting stable growth of the Chinese economy; promoting moderate price increases; balancing support for real economic growth and the health of the banking industry; maintaining the basically stable and reasonable equilibrium level of the RMB exchange rate; and emphasizing coordination with fiscal policy.

In supporting the real estate market, banks have lowered existing mortgage rates, which is beneficial for further reducing borrowers' mortgage interest payments, and also can constrain the space for illicit replacement of existing mortgages.

Specifically:

First, reduce the deposit reserve ratio and policy interest rates. The recent reduction of the deposit reserve ratio by 0.5 percentage points will provide long-term liquidity of approximately 1 trillion yuan to the financial markets; depending on the market liquidity conditions within the year, there may be opportunities to further reduce the deposit reserve ratio. Lowering the central bank's policy interest rate, the 7-day reverse repurchase operation rate was lowered by 0.2 percentage points from the current 1.7% to 1.5%, guiding the loan market quote rates and deposit rates to move down simultaneously, maintaining the stable net interest margin of commercial banks.

Second, reduce existing home loan rates and unify the minimum down payment ratio for home loans. Guide commercial banks to lower existing home loan rates to levels close to newly issued home loan rates, with an average expected decrease of around 0.5 percentage points. Unify the minimum down payment ratio for first and second home loans, reducing the minimum down payment ratio for second home loans from 25% to 15%. Increase the central bank's funding support ratio from 60% to 100% for the 300 billion yuan in May's People's Bank of China's affordable housing refinancing, enhancing market incentives for banks and acquiring entities. Extend the maturity of operational property loans due at the end of the year and the "Financial 16 Measures" stock financing extension policy to the end of 2026.

Third, create new monetary policy tools to support the stable development of the stock market. Introduce securities, funds, and insurance companies' mutual exchange convenience, supporting eligible securities, funds, and insurance companies to obtain liquidity from the central bank through asset pledges, significantly enhancing fundraising and stock shareholding capabilities. Establish a special refinancing facility for stock repurchase and holding, guiding banks to provide loans to listed companies and major shareholders to support share buybacks and holdings.

Lowering interest rates and reserve ratios to support stable growth, stable prices, and stable exchange rates.

According to the content of this press conference, in terms of overall quantity monetary policy, Pan Gongsheng clearly stated at this press conference that the central bank will reduce reserve requirements and interest rates.

Currently, the weighted average deposit reserve ratio for financial institutions is 7%. Large banks will be reduced from the current 8.5% to 8%, and medium-sized banks from the current 6.5% to 6%; rural financial institutions and others that have implemented a 5% deposit reserve ratio will no longer be reduced. After the reduction, the average deposit reserve ratio of the banking industry is about 6.6%, and depending on liquidity conditions, the deposit reserve ratio may be further reduced by 0.25 to 0.5 percentage points before the end of the year.

First, reduce the deposit reserve ratio and the policy interest rates. The recent reduction of the deposit reserve ratio by 0.5 percentage points will provide long-term liquidity of approximately 1 trillion yuan to the financial markets; depending on the market liquidity conditions within the year, there may be opportunities to further reduce the deposit reserve ratio. Lowering the central bank's policy interest rate, the 7-day reverse repurchase operation rate was lowered by 0.2 percentage points from the current 1.7% to 1.5%, guiding the loan market quote rates and deposit rates to move down simultaneously, maintaining the stable net interest margin of commercial banks.

In reducing the policy interest rates, this time, the 7-day reverse repurchase operation rate has been reduced from 1.7% to 1.5%. Under the market-based interest rate control mechanism, this adjustment has driven various market benchmark interest rates to be readjusted.

It is expected that this policy interest rate adjustment will lead to a reduction of approximately 0.3 percentage points in the Medium-term Lending Facility (MLF) rate, and the expected Loan Prime Rate (LPR) and deposit rates will also decrease by 0.2 to 0.25 percentage points.

Overall, the People's Bank of China has five considerations in monetary policy regulation: first, to support stable growth of the Chinese economy; second, to promote moderate price increases; third, to balance supporting growth of the real economy and the health of the banking industry; fourth, to maintain the RMB exchange rate at a reasonable and balanced level and basically stable; fifth, to focus on coordination with fiscal policy.

The overall impact of this interest rate adjustment on banks' net interest margin is neutral. Lowering existing housing loan rates will reduce banks' interest income, but it will also reduce early repayment behavior. The central bank's reserve requirement cut is equivalent to providing low-cost funds for banks to operate directly, and interest rate reductions can also reduce banks' funding costs. In addition, the expected LPR and deposit rates will symmetrically decrease, and the effects of guiding deposit rate cuts in the previous rounds are also accumulating. Considering various policies, the net interest margin will remain basically stable.

Create new tools to stabilize the stock market and boost confidence.

To maintain the stability of China's capital markets and boost investor confidence, the People's Bank of China, together with the China Securities Regulatory Commission and the China Banking and Insurance Regulatory Commission, has agreed to create two structural monetary policy tools to support the stable development of the capital markets.

Pan Gongsheng pointed out that these two tools are the People's Bank of China's first creation of structural monetary policy tools to support the capital markets.

Securities, funds, and insurance companies can swap facilitation with eligible securities, funds, and insurance companies, using bonds, stock ETFs, CSI 300 component stocks, and other assets as collateral to exchange for high-liquidity assets such as national debt and central bank bills from the central bank. This will significantly enhance their capital acquisition and stock shareholding capacity. The initial operation scale is 500 billion yuan, and the funds obtained through this tool can only be used for stock market investments. If the later evaluation shows good results, the operation scale can be increased.

Share buyback and shareholding special rediscounting guide banks to provide loans to listed companies and major shareholders to support share buybacks and shareholding of listed company stocks. The central bank provides rediscounting to banks, with a 100% funding support ratio and a rediscounting rate of 1.75%. Commercial banks provide an initial loan limit of 300 billion yuan to customers, which can be expanded in the future depending on usage.

According to officials close to the central bank who spoke to Securities Times reporters, the central bank created new tools aimed at stabilizing the stock market and boosting confidence. The convenience of swaps will greatly enhance the ability of institutions to obtain capital and increase their shareholding capabilities. This move will significantly improve the convenience for relevant institutions to obtain funds, and the financing through swaps is limited to the stock market, benefiting the stable market role of securities, funds, and insurance companies.

From an international perspective, there have been many successful experiences both domestically and internationally with similar swap tools like the Term Securities Lending Facility (TSLF) introduced by the Federal Reserve in 2008 and the Central Bank Bills Swap (CBS) tool introduced by the central bank in 2019.

It should be noted that the convenience of swaps does not involve direct money transfer and will not expand the basic monetary supply. Securities, funds, and insurance companies' swap convenience is based on a "swap for securities" approach, which not only enhances non-bank institutions' financing capabilities but also does not directly provide funds to them, thus not injecting basic money.

The central bank has established a special re-lending program to encourage banks to provide loans to listed companies and major shareholders, supporting share buybacks and increased holdings of listed company stocks. This special re-lending program does not involve the central bank directly or indirectly providing loans to enterprises, but rather through incentive-compatible mechanisms, guiding 21 nationwide banks to provide loans to eligible listed companies and major shareholders on a voluntary decision-making and risk-sharing basis, with the central bank providing 100% support for the loans with re-lending.

Further reduce borrowers' interest payments on mortgage loans.

Based on the content of this press conference, in order to support the stable and healthy development of the real estate market, the People's Bank of China plans to introduce five real estate financial policies in conjunction with the China Banking and Insurance Regulatory Commission:

First, in terms of reducing mortgage interest rates for existing properties, the People's Bank of China plans to guide banks to collectively adjust the interest rates on existing house loans to be near the interest rates for new house loans, with an average expected decrease of around 0.5 percentage points.

Second, unify the minimum down payment ratio for mortgages to 15%. Nationally, commercial individual housing loans will no longer differentiate between first and second homes, with the minimum down payment ratio unified at 15%. Commercial banks will determine the specific down payment ratio level based on the customer's risk profile and preference.

Third, extend the deadline for two real estate financial documents. It is proposed to extend the policy of extending existing financing and operational property loans in the "16 Financial Measures" to the end of 2026.

Fourth, optimize the policy for refinancing of affordable housing. It is proposed to increase the proportion of funds supported by the People's Bank of China from 60% to 100% in the policy for refinancing affordable housing, accelerating the destocking of commercial housing.

Fifth, support the acquisition of existing land by real estate companies. In addition to using some local government special bonds for land reserves, the policy-oriented banks and commercial banks will research on allowing loans to support conditionally enterprise-led market acquisitions of real estate companies' land, revitalizing existing land use, and alleviating the financial pressure on real estate companies. If necessary, the People's Bank of China can provide policy support.

Overall, the reduction of interest rates on existing housing loans by banks is conducive to further reducing borrowers' interest expenses on housing loans, promoting consumption and investment, and also beneficial for reducing early repayment behavior. This rate cut on existing housing loans is expected to benefit 50 million households, 0.15 billion people, reducing annual household interest expenses by around 150 billion yuan.

Furthermore, the reduction of interest rates on existing housing loans by banks can also compress the space for illegal replacement of existing housing loans, protect the legitimate rights and interests of financial consumers, and maintain the stable and healthy development of the real estate market.

Editor/rice