The possibility of RRR reduction has increased significantly in the near future. On December 3, when meeting with Georgieva, President of the International Monetary Fund (IMF), Premier Li Keqiang mentioned that China will continue its prudent monetary policy, “maintain reasonable and sufficient liquidity, formulate policies around the needs of market players and reduce reserve requirements in due time.” The formulation of “timely RRR reduction” has attracted market attention. Some time ago, with the implementation of carbon emission reduction support tools in November and the central bank’s increase in the scale of open market operations, the market’s expectations for RRR reduction had cooled. After the premier’s speech, the possibility of RRR reduction has increased significantly. Historically, the time interval from the deployment of the national standing committee or the mention of RRR reduction on other occasions to the central bank’s announcement of RRR reduction is 2-11 days, and the time to the implementation of RRR reduction is about 2 weeks. However, there are exceptions, such as the national ordinary meeting on June 17, 2020.
The real economy weakened significantly in the third quarter to support the necessity of RRR reduction: in the economic data of the third quarter, except that consumption was slightly higher than expected, other economic data were basically lower than expected. The dependence of economic growth on real estate investment is still high. Under the control of real estate, the decline of real estate investment continued to drag down economic growth. According to the questionnaire of the central bank in the third quarter, the demand for financing of all subjects weakened comprehensively. Meanwhile, the actual financing interest rate of downstream enterprises in 2021 is still rising compared with previous years, and the downstream manufacturing industry is still under pressure. Yi Gang, governor of the people’s Bank of China, mentioned in the article “China’s interest rate system and market-oriented reform of interest rates” that China’s potential economic growth is still expected to remain in the range of 5% – 6%, but GDP grew by 4.9% year-on-year in the third quarter, falling below this potential growth range. The market is pessimistic about economic growth in 2022.
Price constraints on RRR reduction are not strong, and it is difficult to significantly relax the real estate Deregulation: according to the central bank’s survey in the third quarter, the inflation expectation of the residential sector is weak, and inflation will not constitute an obstacle to the relaxation of monetary policy. The supervision in the field of housing is closely related to the goal of “common prosperity”. Recently, the central high-level’s statement on the real estate regulation policy shows that the tone of the current real estate has not changed. However, considering the radiation effect of the real estate industry on the upstream and downstream, the default of real estate enterprises will bring a chain reaction and threaten the stability of the financial system and the real economy. In November, the real estate regulatory policy was relaxed, but the data is still significantly weaker than in previous years. At the same time, the relaxation cycle of real estate needs at least 4 months, which has limited impact on the economy in the short term.
The overall pulling effect of the refinancing rediscount policy on social finance is limited, mainly due to the large maturity of this tool: Recently, there are rumors in the market that the central bank may create a total of 1 trillion green refinancing rediscount tools, so as to drive the growth of social finance. However, according to our calculation, the pulling effect may be relatively limited, mainly due to the large maturity of refinancing and rediscount. From the history since 2014, the average monthly net amount of refinancing is not high after considering the maturity. According to the rhythm of refinancing in 2020221, we estimate that the total amount of refinancing maturity in the fourth quarter of 2021 and the whole year of 2022 is between 340 billion yuan and 1100 billion yuan. Considering that the monetary policy is 7, it will bring a pressure drop between 2380 billion yuan and 7700 billion yuan to the social finance stock. At the same time, we consider the net recovery of about 584.3 billion PSL next year. On the whole, even if a total of 1 trillion refinancing rediscount line is added in the fourth quarter and next year, considering that the currency multiplier is 7, the driving effect of the net investment of refinancing rediscount on social finance in the whole year of next year is between – 1.57% and 0.017%, which is relatively limited. Therefore, it is necessary for the central bank to drive the recovery of social finance and boost the confidence of the real economy through the reduction of the total reserve requirement.
To sum up, the economic data are in full decline, the loan demand of various industries is in full decline, and there is little possibility of substantive relaxation in real estate. At the same time, the transmission of PPI to CPI is very limited. According to the survey data of the central bank in the third quarter, the inflation expectation of the residential sector is weakened, and the expectation of house price rise is obviously weakened under the background of real estate regulation. The need to reduce confidence to provide confidence in the market is high. At the same time, a reduction in the current environment will not result in a new round of asset price bubbles. In order to hedge against the maturity of 950 billion MLF in December, a comprehensive RRR reduction is still possible. We predict that the RRR reduction will be implemented within 1-2 weeks. From the perspective of the bond market, the RRR reduction has injected a lot of medium and long-term liquidity into the banking system, and the loose signal will drive the Treasury bond yield down. For the stock market, RRR reduction is conducive to market risk appetite. For the foreign exchange market, the RRR reduction can partially alleviate the current pressure of RMB appreciation.
