The People's Bank of China website announced on September 27 that the People's Bank of China (referred to as the "central bank") decided to: lower the reserve requirement ratio for financial institutions by 0.5 percentage points from September 27, 2024 (excluding financial institutions that have implemented a 5% reserve requirement ratio). After this reduction, the weighted average reserve requirement ratio for financial institutions is approximately 6.6%.

The central bank also announced in the open market business notice that starting from September 27, the 7-day reverse repurchase operation rate in the open market will be adjusted from the previous 1.70% to 1.50%. The operation rates of 14-day reverse repurchase and temporary reverse and repurchase operations will continue to be determined based on the 7-day reverse repurchase operation rate, with the same margin maintained.

This policy rate cut is the largest in nearly four years and is an important manifestation of supportive monetary policy, which will lower the overall social financing cost through transmission. Authoritative experts point out that the central bank's substantial interest rate cut this time will continue to boost market confidence. Further consolidating the consensus on high-quality development, solidifying the foundation for the sustained stability and improvement of the capital market, and providing sufficient impetus for healthy and upward market development.

Authoritative experts pointed out that the simultaneous implementation of reserve requirement cuts and interest rate cuts fully reflects the intensification of monetary policy regulation, demonstrating the determination to achieve the annual economic and social development goals through concrete actions.

The new round of reserve requirement cuts releases sufficient long-term liquidity.

Previously, on September 24, at a press conference held by the State Council Information Office, Pan Gongsheng, Governor of the People's Bank of China, introduced that the People's Bank of China will soon cut the reserve requirement ratio by 0.5 percentage points, providing approximately 1 trillion yuan of long-term liquidity to the financial market.

Currently, the weighted average reserve requirement ratio for financial institutions is 7%. After the reserve requirement cut, the reserve requirement ratio for large banks will be reduced from the current 8.5% to 8%, and for medium-sized banks from the current 6.5% to 6%; rural financial institutions, as they are already subject to a 5% reserve requirement ratio, are not included in this adjustment.

Pan Gongsheng also stated that after the reserve requirement cut, the average reserve requirement ratio for banks is approximately 6.6%, which still provides some room for adjustment compared to the central banks of major international economies. Depending on liquidity conditions, the reserve requirement ratio may be further reduced by 0.25 to 0.5 percentage points by the end of the year.

Overall, the reserve requirement cut releases more abundant long-term liquidity, strengthens the coordination of monetary and fiscal policies. The interviewed experts unanimously pointed out that the reserve requirement cut helps optimize the capital structure, save bank costs, to a certain extent, alleviate the pressure of narrowing net interest margins; provides long-term low-cost funds to the banking system, stabilizes credit expansion, and enhances the momentum and sustainability of serving the real economy.

Currently, it is the peak period of government bond issuance. According to Wind data, as of September 24th, local government special bonds have already issued 921.883 billion yuan within the month, with the monthly issuance scale hitting a new high for the year. Wang Qing, Chief Macro Analyst of Orient Securities, told Securities Times that the central bank's reserve requirement cut can strongly support government bond issuance, and will also support banks to increase credit extension in the fourth quarter, potentially reversing the trend of less year-on-year increase in RMB loans in the first 8 months.

On the other hand, the existing Medium-term Lending Facility (MLF) will still mature around the 15th of each month, affecting mid-month liquidity. Wind data shows that the maturity scale of MLF from October to mid-December this year is higher than September, at 789 billion yuan, 1450 billion yuan, 1450 billion yuan respectively.

Minsheng Bank's Chief Economist Wen Bin told reporters that the amount of MLF maturing in the subsequent months of this year is gradually increasing. By replacing some expiring MLF through the reserve requirement cut, it can alleviate the pressure on the central bank's continuous operation and further reduce the interest rate color of MLF.

The interest rate cut magnitude is the largest in nearly four years and will continue to boost market confidence.

Previously, Pan Gongsheng announced at the State Council Information Office press conference on September 24th that the central bank will lower the central bank's policy interest rate. The 7-day reverse repo operation rate of the open market was lowered by 0.2 percentage points to guide the downward movement of loan market quote rates and deposit rates, maintaining the stability of commercial bank's net interest margin.

Authoritative experts pointed out that this policy interest rate cut is the largest in nearly four years, an important manifestation of supportive monetary policy, which will reduce the overall social financing costs. This 20 basis point cut in the policy interest rate reflects the requirement of being "forceful," under the market-oriented interest rate control mechanism, it will drive various market benchmark interest rates down. It is expected that this policy rate cut will also guide deposit rates and Loan Prime Rate (LPR) to decrease simultaneously, maintaining the stability of commercial banks' net interest margin. Also, lowering the interest rate will push down the comprehensive financing costs of the real economy, supporting stable economic growth.

The central bank's significant interest rate cut this time will continue to boost market confidence. With a series of incremental policy support recently, market expectations have significantly improved. The A-share market has been rising for consecutive days, with the Shanghai Composite Index continuously breaking through the 2800 points, 2900 points, and 3000 points levels, accompanied by a significant increase in trading volume. In this context, the People's Bank of China announced the interest rate cut at 8 o'clock this morning, which is conducive to maintaining the continuity of policy intensity, further consolidating the consensus on high-quality development, solidifying the foundation of the capital market's sustained stability, and providing sufficient momentum for the healthy and upward development of the market.

Pan Gongsheng previously pointed out that the expected policy rate adjustment will lead to a decrease of about 0.3 percentage points in the medium-term lending facility (MLF) rate, and it is expected that the loan market quoting rate (LPR) and deposit rate will symmetrically decrease by 0.2 to 0.25 percentage points.

The MLF winning bid rate is the first market-oriented rate to decrease after the central bank announces reserve requirement ratio cuts and interest rate arrangements, reflecting the effectiveness of incremental financial support policies. On September 25, the central bank conducted a 300 billion yuan MLF operation, with the winning bid rate down by 0.3 percentage points from the previous month.

Further strengthen the policy nature of the 7-day reverse repurchase rate in the open market.

Authoritative experts pointed out that this interest rate cut will further strengthen the policy nature of the 7-day reverse repurchase rate in the open market.

The operation rates of other open market repurchase instruments will be adjusted in sync according to the rules. This announcement also mentioned, 'The operation rates of 14-day reverse repurchase and temporary reverse repurchase will continue to be determined as a spread above or below the 7-day reverse repurchase operation rate, with the spread remaining unchanged.' Following this rule, the 14-day reverse repurchase operation rate will be adjusted to 1.65%; the operation rates of temporary reverse and reverse repurchase will be adjusted to 2.0% and 1.3% respectively.

Pan Gongsheng clearly stated at the Lujiazui Forum in June that the 7-day reverse repurchase operation rate has essentially taken on the function of the main policy rate. This time, the central bank once again announced an interest rate cut by adjusting the 7-day reverse repurchase operation rate in the open market, further confirming the reform direction of the central bank to improve the market-oriented interest rate control mechanism.

Zou Lan, Director of the Monetary Policy Department of the People's Bank of China, mentioned at the press conference of the State Council Information Office on September 5 that the central bank has clearly defined the 7-day reverse repurchase operation rate as the main policy rate. The 7-day reverse repurchase has changed from the original rate bidding to a fixed rate and quantity bidding, fully meeting the bidding needs of primary dealers. The rate is no longer the bid result, but is determined by the central bank according to the needs of implementing monetary policy, and the quantity is no longer a means for the central bank to adjust liquidity, but is jointly determined by primary dealers based on policy rates and their market judgment, which helps enhance the proactivity of institutional liquidity management.

Authoritative experts also pointed out that the 14-day reverse repurchase operation rate conducted on September 23 was 10 basis points lower than the previous one (before the Spring Festival), which was misinterpreted by some market institutions as an interest rate cut, but in fact, it was just a follow-up adjustment to the 7-day reverse repurchase operation rate decrease on July 22, without any policy implications.

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