Event: on April 13, 2022, the executive meeting of the State Council made a deployment, “timely use the RRR reduction and other monetary policy tools to further strengthen the financial support to the real economy, especially the industries seriously affected by the epidemic, small, medium-sized and micro enterprises and individual industrial and commercial households, make reasonable profits to the real economy and reduce the comprehensive financing cost.”
Interpretation:
I. This RRR reduction will be implemented within one to two weeks, which will be a comprehensive RRR reduction.
The communiqu é of this national regular meeting uses “decision of the meeting” rather than “pointed out by the meeting” and other suggestive words, indicating that there is no suspense about the implementation of RRR reduction. According to the law since 2017, the “timely” mentioned in the national Standing Committee means that the RRR reduction will be announced and implemented by the central bank within 2-19 days. Considering the current economic situation and the requirements of “early and fast” policies and measures to stabilize growth, we believe that the RRR reduction rate will be implemented in one to two weeks, and the central bank will announce its implementation as soon as Friday (April 15). In addition, this RRR reduction will be a comprehensive RRR reduction of 0.5 percentage points, releasing about 1.25 trillion long-term funds, saving about 15 billion yuan of capital cost for banks every year (the current deposit reserve interest rate is 1.62%, MLF interest rate is 2.85%. After the comprehensive RRR reduction, the annual capital cost saved by banks is 1.25 trillion (2.85% – 1.62%) = 15.38 billion yuan).
II. Recently, the downward pressure on the economy has increased, which is the direct reason for the deployment of RRR reduction by the national standing committee, which can play three roles.
The recent symposium held by the State Council and the national standing committee pointed out that “we should be highly vigilant against some unexpected changes in the international Chinese environment” and judge that “the downward pressure on the economy is further increasing”. Combined with the recent changes in the internal and external environment, three factors exceeded expectations: first, the epidemic situation in Shanghai, Jilin and other places repeated and formed a national impact; Secondly, the cold situation of real estate has continued since the beginning of the year; Finally, the international geopolitical situation has significantly escalated, and the effect of “depressing economic growth and pushing up inflation” has been formed all over the world. The superposition of the above factors requires timely hedging by macro policies, which is the fundamental background for the deployment of RRR reduction at this national regular meeting. The RRR reduction has three functions: first, release long-term funds on a large scale, directly increase the lending capacity of banks, help broaden credit, and especially promote the moderate growth of the scale of new loans. Looking back on the four rounds of steady growth since 2008, it has been accompanied by the phased increase in the growth rate of various loan balances. Since the second half of last year, the growth rate of various loan balances has been falling. As of March this year, the index is still hovering near the low point in nearly 20 years. We judge that this RRR reduction will promote banks to speed up loan issuance, and the growth rate of various loan balances will hit the bottom in April. In fact, it is also the policy intention of this regular meeting to “encourage large banks with high provision level to reduce the provision rate in an orderly manner”. Reducing the provision rate can thicken the bank’s profits, and the capital scale converted from retained profits will increase accordingly, which can alleviate the capital adequacy constraints faced by banks in the process of loan issuance. The reason behind this is that since the strong supervision in 2017, China’s systemic financial risks have entered a convergence process, the financial robustness has continued to improve, and has withstood the impact of the epidemic in 2020. Therefore, the conditions for moderately reducing the bank reserve ratio are available.
