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In order to support the development of the real economy and promote the steady decline of comprehensive financing costs, The people's Bank of China decided to reduce the deposit reserve ratio of financial institutions by 0.5 percentage points on December 15, 2021 (excluding financial institutions that have already held a 5% deposit reserve ratio). After this reduction, the weighted average deposit reserve ratio of financial institutions is 8.4%. This reduction is a comprehensive reduction, and the reduction releases a total of about 1.2 trillion yuan of long-term funds.
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Reduce the reserve requirement and replace MLF to maintain sufficient liquidity at the end of the year. Following the release of the RRR reduction signal when Premier Li Keqiang met with the president of the IMF last Friday, the central bank officially lowered the RRR on Monday afternoon, releasing a total of about 1.2 trillion yuan of long-term funds. The form of this RRR reduction is similar to that in July, which is a combination of comprehensive RRR reduction and repayment of due MLF. According to the data, in December and January next year, the central bank will have 950 billion MLF and 500 billion MLF due respectively, with a total of 1.45 trillion yuan. Superimposed with the seasonal factors of large financing demand for national bonds and local bonds in December and large liquidity demand at the end of the year, it is difficult to simply continue MLF to fill the gap. Therefore, after deducting the MLF replacement in December, this RRR reduction can release about 250 billion yuan of long-term funds freely used by banks, so as to maintain a stable ending of liquidity at the end of the year. At the same time, at present, the central bank's creditor's rights to other deposit companies account for more than 33% of the total assets, which again exceeds one third of the central bank's asset scale. It is a better choice to adjust the balance sheet structure by reducing the reserve requirement, so as to promote credit expansion by putting in the excess reserve rate.
Bank financing costs are reduced and the space for interest rate reduction is opened. By reducing the reserve requirement and replacing part of the maturing MLF, it helps to reduce the capital cost of the bank's liability side, and then transmit it to the asset side, so as to reduce the comprehensive financing cost for the entity sector. According to the disclosure in the third quarter report of the central bank that "the RRR reduction in July has reduced the capital cost of financial institutions by about 13 billion yuan per year", this RRR reduction can save about 15 billion yuan of interest expenditure for the banking system, so it will save a total cost of more than 28 billion yuan. After the two accumulations, the change range of bank capital cost further touched the adjustment threshold of 5 basis points, and the space for LPR reduction was opened to guide the decline of loan weighted average interest rate, reduce financing costs for the real sector and stabilize the current economic and employment situation.
Keep the tone of steady growth unchanged and strengthen cross cyclical adjustment. The statement of monetary policy at the Politburo meeting held on December 6 was slightly different from that before. The "prudent monetary policy should be flexible, accurate, reasonable and appropriate" in December 20 and July 21 was revised to "prudent monetary policy should be flexible and appropriate". With the increasing downward pressure on the economy, the primary goal of monetary policy has been switched to steady growth. The actual year-on-year growth rate of GDP in the third quarter fell to 4.9% higher than expected, and it is expected that GDP in the fourth quarter will continue to decline. We believe that the current central bank aims to cope with the downward pressure of economic growth by reducing reserve requirements, make cross cycle adjustment and maintain the overall stability of the economy.
