Event description
On December 6, the central bank announced that it would reduce the deposit reserve ratio of financial institutions by 0.5 percentage points on December 15, 2021 (excluding financial institutions that have implemented the 5% deposit reserve ratio). After deducting 950 billion yuan to repay the MLF due on December 15, this reduction will supplement the long-term funds of financial institutions by about 250 billion yuan.
Event comments
Comprehensive RRR reduction – focusing on “stability”, flexible and accurate. Just a weekend after Premier Li Keqiang released the “RRR reduction” signal, the people’s Bank of China announced a comprehensive RRR reduction, faster than expected. This time, the central bank proposed to continue to implement a prudent monetary policy, adhere to the word of stability, do not engage in flood irrigation, strengthen cross cycle regulation, and make an overall plan for the connection of macro policies this year and next year, which confirms that China’s economy may face greater downward pressure in the fourth quarter and the first half of next year. We believe that China’s monetary policy will be “stable”, flexible and accurate.
What is the significance of “lowering the reserve requirement”? We think, The significance of this “RRR reduction” is twofold: (1) in the face of the new downward pressure on the economy, we should strengthen cross cycle adjustment and better support the real economy, especially for small, medium and micro enterprises. Since the third quarter of this year, the “double limit and double control” has been caused by the multi-point spread of China’s epidemic, extreme weather, real estate deleveraging pressure and energy shortage Due to the impact of external forces such as expansion of scope, China’s economic recovery is restricted by phased, structural and cyclical factors. (2) Reduce the social comprehensive financing cost by reducing the capital cost of financial institutions (about 15 billion yuan per year).
Macro policy “four major concerns”. (1) “Steady growth” as the main line: at present, China’s economic recovery is under pressure, “steady growth” is still the main tone of the policy for a period of time. While “steady growth”, we pay attention to “risk prevention”. (2) “active” fiscal policy + “prudent” monetary policy: we emphasize the robustness of monetary policy and insist on not engaging in “flood irrigation” , targeted financial support will be given. (3) Do a good job in “cross cycle regulation”: the central government emphasizes the continuity, stability and sustainability of macro policies, and there will be no possibility of sudden policy change even under the downward pressure of the economy. (4) “focus on me” : the emphasis on the independence of macro policy reflects the requirement of maintaining their own policy independence under the expectation of tightening monetary policy by overseas economies at this stage, and will not change China’s policy direction under the influence of foreign macro policy environment.
Will interest rates be cut in the future? We believe that as long as the economic downside risk is still controllable and the long-term fundamentals have not changed, the central bank will have a greater probability of using the “reserve requirement reduction” + targeted policy tool, rather than the strongest loose tool “interest rate reduction” to deal with the possible economic downside pressure.
Investment advice The short-term “RRR reduction” is good for the financial sector; Long term focus on the three directions of “small and medium-sized enterprises, green development and scientific and technological innovation”. We suggest that investors focus on: (1) securities companies; (2) hard technology enterprises and high-end manufacturing enterprises, especially “specialized and new” small and medium-sized enterprises; (3) new energy auto parts, photovoltaic, energy storage, wind power and other “green energy” sectors.
