Central Bank, Financial Regulators Launch Major Moves: Impact Analysis

The State Council Information Office held a press conference on the morning of September 24th, where the main leaders of the People's Bank of China, the General Administration of Financial Regulation, and the China Securities Regulatory Commission introduced the situation regarding financial support for high-quality economic development. A number of major policies were introduced simultaneously, with a combined force that exceeded expectations.

The expected reduction in reserve requirements and interest rates was not considered a major move. However, the reduction in existing housing loan interest rates and down payment ratios, along with the central bank lending money for share buybacks and increases, all came out at once, which can be considered beyond expectations.

This also indirectly indicates that the current problems are indeed quite serious. This is characteristic of China, similar to a pressure cooker, where when the pressure reaches a certain level, it is released a bit. The fact that so much was released at once shows that the pressure is really high.

First, let's clarify one point: in the current Chinese financial market, reducing the deposit reserve ratio is equivalent to lowering interest rates, but with a slight lag. Many people ask why the Loan Prime Rate (LPR) is not reduced? Our housing loans are tied to the LPR.

The LPR is determined by the free quotation of interbank market interest rates. If banks are short of money, they are willing to report a higher interbank borrowing rate. If they are not short of money, the rate they report will be lower. The tightness of money between banks and each other is effectively regulated by the deposit reserve ratio.

This time, the deposit reserve ratio was reduced by 0.5 percentage points. According to People's Bank of China Governor Pan Gongsheng, banks nationwide can retain an additional one trillion yuan in funds. With this additional one trillion yuan, banks will inevitably lower the interbank interest rate quotations. If I have money, I naturally do not want to borrow at high interest rates; this principle is very simple. Therefore, we can expect the LPR to be adjusted downward in October.

Moreover, China's current deposit reserve ratio is still relatively high, with the current weighted average deposit reserve ratio for financial institutions at 7%. Among them, large banks are currently at 8.5%, which will be reduced from 8.5% to 8% this time; medium-sized banks are currently at 6.5%, which will be reduced from 6.5% to 6%; there is still a lot of room for reduction.

Pan Gongsheng also said that by the end of the year, depending on the situation, there may be further reductions. In fact, the meaning is very clear, that is, there will definitely be a reduction at the end of the year, and it may be another 0.5 percentage points reduction, releasing another one trillion yuan in liquidity. At that time, it will stimulate another reduction in the LPR interest rate.Overall, this is good news; it's better than holding back. Some argue that a reserve requirement ratio (RRR) cut is useless because banks have money but can't lend it out, as no one is borrowing now. This view only sees one aspect of the situation. We should recognize that a RRR cut is essentially a form of interest rate reduction, and a reduction in interest rates is generally a positive development.

This is a potential interest rate cut. To ensure the public fully understands, there was also a clear announcement of a reduction in existing housing loan rates. Currently, there are about 30 to 40 trillion yuan in housing loans nationwide. A reduction of just one percentage point could relieve a burden of 300 to 400 billion yuan.

Although this amount is not substantial, it is better than nothing. While it may not have a significant impact on smaller cities, it can provide some relief for those in first and second-tier cities. In large cities where housing loan burdens are heavy, loans often exceed a million yuan. For those with loans in the millions, the monthly savings can be quite substantial. Some people who were planning to sell their homes may decide to hold on after recalculating their finances. They might grit their teeth and continue to pay, which is beneficial for the real estate market.

The original intent of the policy was to protect first and second-tier cities, with lower priority given to third and fourth-tier cities and small towns. Even for top-level decision-makers, it is acceptable not to intervene.

The most shocking aspect is its impact on the stock market, as the central bank has indirectly entered the fray. For the first time, the central bank has created, note the term, innovatively established structural monetary policy tools to support the capital market.

The first initiative is the creation of a swap facility for securities, funds, and insurance companies, supporting eligible securities, funds, and insurance companies in obtaining liquidity from the central bank through asset collateralization. This policy will significantly enhance the institutions' ability to obtain funds and increase their capacity to buy stocks.

The second initiative is the creation of a special re-lending facility for stock buybacks and share increases, guiding banks to provide loans to listed companies and major shareholders to support stock buybacks and share increases.

An additional condition is attached: the funds obtained can only be invested in the stock market. In essence, this is the central bank directly providing money, telling you to buy stocks.The central bank, due to legal restrictions, cannot directly intervene; you, the fund securities companies and insurance companies, are the ones who help the central bank carry out such tasks. Moreover, Pan Gongsheng also said: Start with 500 billion, if it's effective, then another 500 billion, and it's possible to have another 500 billion. The implication is very clear: We have plenty of money, we really have plenty of money, it all depends on how much you need, how much you want, I have as much as you need. That's what it means, right?

Has it been effective? Anyway, today's stock market has performed quite well, and it's quite impressive. Let's see the subsequent performance.

Lowering reserve requirements and mortgage rates, essentially, is intended to alleviate the burden on residents, with the fundamental goal of boosting consumption capacity. An important signal from this press conference is that the higher-ups may also realize that the common people really have no money. Relying solely on lowering reserve requirements and interest rates, the potential for released consumption should be low, and the hope is not high.

Therefore, by linking the central bank's policies with the China Securities Regulatory Commission, the higher-ups' intentions are also revealed. If the stock market can also rise a bit in sync, it can effectively offset the anxiety caused by the decline in residents' real estate assets. If your house falls but your stocks rise, maybe you won't be too pessimistic about the future, and you might be willing to take out some money to spend.

Don't underestimate this point. In the past, the higher-ups' view was that they always thought you had money but didn't spend it, but in reality, you really had no money to spend. Now they have also realized that it seems you really have no money, so let me think of a solution for you. Now there is somewhat of that meaning.

However, this is far from enough. To truly stimulate consumption, relying solely on financial policies is far from enough. It also requires other supporting policies to work together, such as: increasing the intensity of livelihood security, improving the level of social welfare, and stabilizing employment expectations.

Residents have never lacked consumption capacity; if they can't afford it, they can borrow. The key is to truly enhance residents' confidence in consumption, so that the policy's "combination punch" can truly unblock the "meridians" of consumption.