With the total amount of MLF and reverse repo due this week exceeding 1.5 trillion, combined with factors such as the 15th day reserves payment and tax period, the market is once again focusing on the topic of reserve requirement ratio cut or interest rate reduction.

On November 11th, a bond analyst from a commercial bank in North China stated that in addition to factors such as the maturity of funds and tax periods, factors such as the approaching Singles' Day leading to increased margin requirements for payment institutions all objectively require the central bank to increase liquidity injection.

The individual mentioned that the central bank has already stated that it intends to cut the reserve requirement ratio before the end of the year. The market currently generally expects the second half of the month to be the first time point for reserve requirement ratio cuts.

However, a senior fixed income analyst from a large brokerage firm in Shanghai told CaixinLianhe News that this week, the central bank is most likely to maintain liquidity through reverse repurchase agreements and continued MLF operations; the timing for reserve requirement ratio cuts has not arrived yet, and it is expected to increase liquidity through reserve requirement ratio cuts when issuing government bonds on a large scale in the second half of the month or in December.

Gtja, CICC, Tianfeng, and other institutions determine that interest rate cuts in the medium term are constrained by exchange rates and net interest margins; a reserve requirement ratio cut in the short term is more feasible, with an expected announcement in late November and implementation in early December.

Zhong Zhengsheng, Chief Economist of Ping An Securities, believes that the central bank will inevitably be on high alert in terms of exchange rates. On one hand, it needs to manage expectations to avoid the Renminbi exchange rate deviating excessively from the fundamentals due to the "herd effect"; on the other hand, it needs to maintain flexibility and retain the possibility of hedging against US tariff increases through depreciation.

Expect reserve requirement ratio cuts by the end of November.

At the press conference on September 24th, the Central Bank proposed implementing measures including a 0.5 percentage point reserve requirement cut, a 20 basis point reduction in the 7-day reverse repo rate, reducing existing mortgage rates and unifying the minimum down payment ratio for mortgages, facilitating exchanges between securities, funds, and insurance companies, and introducing policies such as share buybacks and specialized refinancing for shareholdings.

BOC International analyst Zhu Qibing believes that different levels of the proposals have been implemented so far, with the remaining proposal being that "depending on market liquidity conditions for the remainder of the year, there may be an opportune further reduction of the deposit reserve ratio by 0.25-0.5 percentage points."

Data shows that market funding rates began to rise slightly last week. As of Friday, deposit-type institutional pledged repo rates compared to the previous Friday: DR001 increased by 13.3 basis points to 1.4755%, DR007 increased by 5.96 basis points to 1.6104%; non-bank funding rates compared to the previous Friday: R001 increased by 13.72 basis points to 1.6144%, R007 increased by 4.44 basis points to 1.8036%.

In a comprehensive view, Tianfeng Securities analyst Sun Binbin believes that a reserve requirement ratio cut signal can be expected in late November. On one hand, the Central Bank sees the reserve requirement cut as an effective measure to stabilize confidence in various aspects, and the timing for the cut between the NPC Standing Committee on November 8th and the Political Bureau meeting and the Central Economic Work Conference in December could be a policy-suitable choice.

On the other hand, the Central Bank may need to cope with the increasing pressure from the upcoming bond supply within the year. After the NPC Standing Committee announced an additional 6 trillion local government special bond quota on November 8th, with 2 trillion to be issued within the year, the pressure from the December supply is slightly higher than the same period last year. There is a possibility of a reserve requirement ratio cut announcement in late November and implementation in early December.

Interest rate cuts are constrained by net interest margins and exchange rates, and are expected to continue until early next year.

Recently, the Central Bank released the third-quarter monetary policy implementation report. CICC macro analyst Huang Wenjing believes that the report emphasizes increased uncertainty in the external environment and weak social expectations internally, making it crucial to drive a reasonable rise in prices as an important policy consideration.

In response, Chief Economist at Ping An Securities Zhong Zhengsheng also believes that the GDP Smoothening Index at -0.53% for the third quarter has seen six consecutive quarters of negative growth, which hampers nominal economic growth speed and consequently limits fiscal stimulus measures. Until a positive turn in the GDP Smoothening Index is achieved, monetary policy will remain accommodative.

Regarding interest rate cuts, Sun Binbin believes that the current economic operation needs to increase the intensity of counter-cyclical adjustments, but further interest rate cuts face the dual constraints of net interest margin and exchange rate internal and external.

GTJA analyst Han Zhaohui also believes that excessively low net interest margins, banks' excessive competition in lending, and the existence of a deposit scale mentality are the main factors affecting interest rate transmission efficiency, thereby restricting policy space. On the one hand, excessive bank competition in lending leads to excessively low loan interest rates, and on the other hand, some banks still have the mentality of pursuing deposit scale, attracting interbank deposits with high interest rates.

Several institutions mentioned above believe that a new focus of the current central bank in strengthening interest rate regulation lies in establishing a self-discipline mechanism for pricing deposit and loan interest rates, reducing irrational competition on both sides of deposit and loan interest rates, suppressing net interest margins, and providing conditions for interest rate cuts.

In addition, the exchange rate remains a problem constraining interest rate cuts.

Tianfeng Securities' Sun Binbin believes that after the U.S. election, the U.S. dollar index appreciated, with the U.S.-China interest rate spread inverting by over 200 basis points. Based on the comprehensive performance and outlook of exchange rates and the U.S.-China interest rate spread, there may still be external equilibrium pressure on interest rate cuts in the short term.

Han Zhaohui observed that the recent widening of the U.S.-China interest rate spread and the rebound in the forex forward premium. However, the Fed's recent implementation of interest rate cuts still has a high level of certainty, and it is expected that the best window for further interest rate cuts in China will be before Q1 2025.

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