The Governor of the People's Bank of China, Pan Gongsheng, stated at a press conference held by the State Council Information Office on September 24th that the reserve requirement ratio will be lowered by 0.5 percentage points in the near future.
Releasing trillions in liquidity
It is noteworthy that this is the second reserve requirement ratio cut this year, and this reduction will provide approximately 1 trillion yuan in long-term liquidity to the financial market.
Pan Gongsheng also indicated that depending on the market liquidity conditions, there may be further reductions in the reserve requirement ratio at an appropriate time within this year.
Prior to this, according to statistics from Ze Ping Macro, since April 2022, China has implemented five comprehensive reserve requirement ratio cuts, releasing approximately 3 trillion yuan in long-term funds.
Affected by this news, in the morning interbank market, the interest rate for the active 10-year government bond dropped to 2%, and the active interest rate for the 30-year government bond dropped to 2.1%.Already Anticipated
It is worth mentioning that the industry had anticipated the central bank's reserve requirement ratio (RRR) cut this time.
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On September 5th, Zou Lan, the head of the Monetary Policy Department of the central bank, stated at a press conference that the average statutory reserve requirement ratio for financial institutions is currently around 7%, and there is still some room for adjustment.
The Huajin Macro Research Team interpreted that recently, the responsible person of the People's Bank of China also clearly mentioned "further downward pressure on deposit and loan interest rates faces certain constraints," implying that there is no room for further interest rate cuts. However, the average statutory reserve requirement ratio "still has some room," which has been clearly predicted since the beginning of the year, maintaining the forecast of a 50BP RRR cut in September.
The institution analyzed that "last September, liquidity injection showed signs of tension, and this September is a reasonable time point for the RRR cut that we have clearly expected since the beginning of the year. We maintain the forecast of a comprehensive RRR cut of 50BP unchanged, to maintain a reasonable credit financing demand support strength and avoid short-term interest rate surges in the money market."
Dagong Global pointed out that the RRR cut can provide banks with more funds, allowing banks to have more sources of funds to support the issuance and use of government bonds. This helps to accelerate the issuance and use of local government special bonds, create more physical work volume, and thus support the active fiscal policy to better exert its effectiveness. Looking at the current overall macro environment, measures to coordinate government bond issuance and reduce bank liability costs are expected to be implemented.
The Zheshang Securities Macro Research Team stated that the RRR cut can reduce the funding costs for banks, thereby affecting the Loan Prime Rate (LPR) and continuing to transmit to the real economy. The institution pointed out that if the central bank cuts the RRR, from the "market interest rate + central bank guidance → LPR → loan interest rate" mechanism, it may lead to a decline of 25BP in both the 1-year and 5-year plus LPR. The reason for the large decline is that the current pricing may be overestimated. In recent years, the proportion of general loans in China that are "discounted" based on the LPR quote has been increasing. In June of this year, the proportion of general loans with interest rates higher than the LPR was 49.55%, the proportion of loans with interest rates equal to the LPR was 6.16%, and the proportion of loans with interest rates lower than the LPR was 44.29%. The proportion of "discounted" pricing increased by nearly 4 percentage points from 40.44% in March, and this data was only 15.55% in August 2019 when the LPR reform was implemented. If the LPR declines further, it may also continue to drive adjustments in bank deposit interest rate pricing.
How will it affect the future market?
According to statistics from the investment advisory team under Fugong Fund, since 2014, on the day after and the fifth day after the central bank announced the RRR cut, the 1-year Treasury bond interest rate has averaged a decline of 3.5BP/3.8BP, and the 10-year Treasury bond interest rate has averaged a decline of 0.6BP/0.5BP.Market interest rates and bond prices have an inverse relationship. When interest rates rise, bond prices fall; conversely, when interest rates decline, bond prices will increase.

Overall, a reserve requirement ratio (RRR) cut is considered a positive factor for the bond market. Specifically, short-term interest rates are more sensitive to changes in monetary policy and liquidity, while long-term interest rates more significantly reflect expectations for the economic fundamentals. Therefore, if a subsequent RRR reduction is implemented, it might be more cost-effective to opt for short-term bonds.
How much impact does an RRR cut have on the A-share market? Historically, looking at the overall situation, the Shanghai and Shenzhen indices tend to rise more often than they fall.