In order to promote banks to enhance their credit lending capacity and support financial enterprises to transfer profits to inclusive financial fields such as small, medium and micro enterprises, the central bank released long-term funds through the combination of general reduction + fixed reduction this month, which helped to promote the decline of banks' long-term capital cost and release downward space for LPR quotation this month. Driven by the national standing committee, the central bank decided to reduce the reserve requirement on the 25th of this month. However, due to the abundant overall liquidity in the near future, the central bank did not implement large-scale RRR reduction this time and paid more attention to structural adjustment. On the other hand, constrained by the unexpected tightening of overseas central banks, monetary policy has become more tangled, and the disturbance caused by this factor has exceeded steady growth in the order of policy measurement. Therefore, considering various aspects, the central bank adopted the policy combination of general reduction and targeted reduction, that is, general reduction of 0.25%, and additional reduction of 0.25% for urban commercial banks without inter provincial operation and rural commercial banks with deposit reserve ratio higher than 5%. A total of 530 billion yuan of long-term funds were released.
According to the law of the impact of the RRR reduction on the change of LPR quotation, superimposed with the impact of the interest rate cut in January and the bank's reduction of the provision rate required by the national standing committee, the LPR for the two periods in April may be reduced by 5bp simultaneously. RRR reduction will help narrow the net interest margin of banks while releasing medium and long-term liquidity. Considering that the reduction of reserve requirement in December 2021 will directly reduce the one-year LPR quotation by 5bp, superimposed with the reduction of the provision rate of large state-owned banks, it is expected that the two-term LPR quotation of this month will be reduced by 5bp symmetrically.
The scale of this RRR reduction is lower than the general expectation of the market. It is expected that the supporting effect of this RRR reduction on the market will be reduced compared with the previous two times. According to the market performance after the implementation of the RRR reduction since 2018, one month after the implementation of the RRR reduction, the maturity yield of 10-year Treasury bonds fell by an average of 6.2bp, while the CSI 300 index mostly corrected. After the implementation of the previous two general reductions, the yield to maturity of treasury bonds decreased steadily within one month, and the Shanghai and Shenzhen 300 index corrected more than two weeks later. However, in view of the fact that the scale of this operation is less than expected and the release of nearly 200 billion yuan of long-term funds is still less than the previous two rounds after excluding the scale of MLF funds recovered by the central bank, the impact of this operation on the market is expected to be greatly reduced.
How will monetary policy work next?
The space for RRR reduction has narrowed again. Using market-oriented means to release the potential of LPR reform will be the starting point of monetary policy in the future. Previously, the central bank generally took care of medium and long-term liquidity and replaced part of MLF operation volume by reducing the reserve requirement at the beginning of the year. However, due to the economic downward pressure and the impact of the epidemic, the central bank has reduced the reserve requirement three times and targeted two times since 2020, the weighted average deposit reserve ratio of financial institutions has dropped to 8.1%, and the deposit reserve ratio of some county financial institutions has been at a low level of 5%, or has reached the bottom line of China's deposit reserve ratio. It is expected that the space for RRR reduction will be further limited in the future. How to release the dividend of interest rate marketization reform will be the key to the next step of monetary policy.
Lowering the floating ceiling of deposit interest rates of small and medium-sized banks or a powerful means for the central bank to compress the additional points of LPR. Today, some commercial banks have received the notice of adjusting the floating ceiling of deposits, which is consistent with our previous expectations. According to the previous working papers and statements of the central bank, we believe that this policy is an important measure for the central bank to deepen the market-oriented reform of interest rates and release the potential of LPR reform. It will guide the decline of medium and long-term deposit interest rates and further promote the decline of bank debt costs.
After the self regulatory ceiling of deposit interest rate was optimized in June 2021, the medium and long-term deposit interest rate declined. If the floating ceiling policy of deposit interest rate of small and medium-sized banks is widely implemented, the possibility of symmetrical reduction of LPR quotation in the next two periods will be greatly increased. As early as 2012, the central bank has accelerated the reform of interest rate marketization policy, and decided in October 2015 not to set a floating ceiling on deposit interest rates for commercial banks and rural cooperative institutions, and the control of deposit interest rates has been basically liberalized. However, due to the blind pursuit of scale by some banks to solicit deposits at high interest rates, the central bank changed the self-discipline upper limit of deposit interest rate to add a point to the benchmark deposit interest rate in June 2021, and the control of deposit interest rate turned. This change will help guide the decline of medium and long-term deposit interest rates, stabilize the cost of bank liabilities, promote the financial system to transfer profits to the real economy, and then promote the narrowing of the five-year LPR.
Risk tip: the spread of the epidemic exceeded expectations, and China's foreign policies exceeded expectations
