Five Questions： The Central Bank’s RRR cut to replace the medium-term lending facilities： What are the benefits and signals to release？

　　BEIJING, April 18 (Reporter Cheng Chunyu) On April 17, the People’s Bank of China decided to reduce the deposit reserve ratio of some financial institutions from April 25 to replace the medium-term lending facilities. Experts believe that this move will reduce the cost of bank capital and corporate financing, benefit the bond market, and help stabilize the stock market and the macro economy.

　　On the 17th, the People’s Bank of China decided to lower the deposit reserve ratio of some financial institutions to replace the medium-term lending facilities. Photo by Yang Mingjing

　　Which banks are involved in this move?

　　According to the notice of the central bank, the RMB deposit reserve ratio will be lowered by 1 percentage point from 25th, involving large commercial banks, joint-stock commercial banks, city commercial banks, non-county rural commercial banks and foreign banks.

　　At present, the benchmark level of these banks’ deposit reserve ratio is relatively high at 17% or 15%, and institutions that borrow MLF are also among these banks.

　　At the same time, the central bank requires that on the same day, the above-mentioned banks will use the funds released by the RRR cut to repay the medium-term lending facilities (MLF) borrowed by the central bank in the order of "borrowing first and returning first".

　　Pan Xiangdong, chief economist of New Era Securities, thinks that MLF cannot completely replace RRR cut. Specifically, MLF has a time limit, which will aggravate liquidity stratification, and MLF needs to pay interest, and financial institutions will pass the cost on to enterprises. By replacing MLF with RRR reduction, the interest payment cost of commercial banks is reduced, which is conducive to reducing the financing cost of enterprises.

　　Why is this time point implemented?

　　The relevant person in charge of the central bank said that at present, China’s small and micro enterprises still face the problem of financing difficulties and expensive financing. In order to increase support for small and micro enterprises, we can replace part of the central bank’s borrowing funds by appropriately lowering the statutory deposit reserve ratio, further increase the stability of the banking system’s funds, optimize the liquidity structure, and appropriately release incremental funds.

　　Pan Xiangdong told reporters that the reason for not lowering the RRR in recent two years is to prevent risks. However, after deleveraging, China’s macro leverage ratio has been controlled, and the RMB exchange rate has been relatively stable and even appreciated since 2017. China’s economic and financial risks have been well controlled, and the constraints on monetary policy have been alleviated.

　　According to Zhang Ming, chief economist of Ping An Securities, the central bank’s move is a "neutral" RRR cut. He believes that the timing of the relaxation of the central bank’s liquidity operation is advanced, which makes the probability of possible tightening of financial regulatory policies in the second quarter decline.

　　How much incremental funds will be released?

　　The relevant person in charge of the central bank said that based on the data at the end of the first quarter of 2018, the MLF was repaid about 900 billion yuan on the day of operation, and the incremental funds were released about 400 billion yuan. Most of the incremental funds were released to city commercial banks and non-county rural commercial banks.

　　The person in charge pointed out that this measure will increase the long-term capital supply and reduce the cost of bank funds. The replacement of MLF can reduce the interest payment cost of commercial banks and help reduce the financing cost of enterprises. The released incremental funds have increased the low-cost sources of loans for small and micro enterprises.

　　Pan Xiangdong also pointed out that cost reduction is the focus of supply-side structural reform this year, and reducing the financing cost of enterprises is the top priority. Previously, the central bank has been implementing the targeted cuts to required reserve ratios, but the release of liquidity is limited, and the problems of difficult and expensive financing for small and micro enterprises have not been effectively solved. This RRR cut can increase the support for small and micro enterprises.

　　What is the impact on financial markets such as the stock market?

　　Zhang Ming said that the direct impact of the central bank’s move is to benefit the bond market and help stabilize the stock market and the macro economy. Pan Xiangdong expressed the same view that the RRR cut is conducive to economic stability and the capital market.

　　Pan Xiangdong added: First, the RRR cut will help ease the pressure on banks’ debt side, reduce the financing costs of enterprises, expand investment and increase the growth rate of manufacturing investment, which has been at a low level for a long time. Second, the RRR cut is conducive to expanding domestic demand and hedging the uncertainty faced by China’s external demand. Third, while supplementing liquidity, it will stimulate the capital market.

　　On the 17th, the four major A-share indexes in China all fell, and the representative Shanghai Composite Index fell 1.41% to close at 3,066.80 points, a record low for the year.

　　Yang Delong, chief economist of Qianhai Kaiyuan, said that the economic fundamentals have not changed. Recently, many high-quality stocks in the A-share market have been wrongly killed. The central bank’s downgrade will boost market confidence, and the market outlook is expected to rebound and gradually repair the previous downward trend.

　　Does the RRR cut mean that the orientation of monetary policy has changed?

　　The reporter noted that some institutions believe that the loose space of monetary policy is open, "the central bank’s move means that monetary policy is fine-tuning."

　　Pan Xiangdong believes that risk prevention is one of the three major battles in 2018, and the prudent neutral monetary policy will not change. In March, the central bank followed the Federal Reserve to raise the short-term money market interest rate, and the government proposed structural deleveraging, all of which have clearly conveyed the determination to prevent risks.

　　"The stable and neutral monetary policy orientation remains unchanged." The relevant person in charge of the central bank made it clear that most of the funds released by the RRR cut were used to repay the medium-term loan facilities, which were substitutes for two liquidity adjustment tools, while the remaining small amount of funds were hedged with the tax period in the middle and late April. Therefore, while optimizing the liquidity structure, the total amount of liquidity in the banking system remained basically unchanged and remained neutral.

　　At the same time, the person in charge said that China is a developing country, and in order to prevent financial risks, it still needs to maintain a relatively high deposit reserve ratio. The People’s Bank of China will continue to implement a prudent and neutral monetary policy, maintain a reasonable and stable liquidity, guide a steady and moderate increase in the scale of monetary credit and social financing, and create a suitable monetary and financial environment for high-quality development and supply-side structural reform. (End)