China’s Reserve Requirement Cut: Boosting Liquidity and Fueling Market Confidence
The People's Bank of China reduced the reserve requirement ratio by 0.5 percentage points and cut policy interest rates, releasing ¥1 trillion ($145 billion) in liquidity.
by Allen, researcher at Ryze Labs
On September 24, Pan Gongsheng, Governor of the People's Bank of China, announced during a press conference at the State Council Information Office that the reserve requirement ratio (RRR) would be reduced by 0.5 percentage points, and the policy interest rate would be lowered by 20 basis points. This move is expected to release approximately ¥1 trillion($145 billion) in long-term liquidity, which accounts for 0.8% of the 2023 GDP, aiming to further reduce corporate financing costs and ease the credit burden on households.
Exploring the Necessity of Reserve Requirement Ratio (RRR) Cuts
First, the domestic environment reveals that China's macroeconomic and financial indicators are quite weak, creating an urgent need for monetary policy to step up support. For example, the manufacturing PMI has remained below 50% for four months, the M1 money supply is experiencing negative growth, and both short-term and medium-to-long-term loans for individuals and businesses are sharply declining. Key indicators for prices, real estate, and consumption are also in a downturn.
Second, with a total of ￥3.69 trillion ($527 billion) in Medium-term Lending Facility (MLF) maturing in the fourth quarter, a 50 basis point cut in the RRR could help mitigate the impact of these maturing funds by replenishing liquidity and reducing banks' funding costs. Furthermore, lowering reverse repo rates and deposit rates would directly and efficiently decrease costs for banks on their liabilities.
Lastly, the recent 50 basis point rate cut by the Federal Reserve presents a timely opportunity for adjustments in China's monetary policy.
Positive Outcomes
Earlier in February, the central bank had already lowered the RRR by 0.5 percentage points, making this the second cut this year. The combined 1 percentage point reduction is projected to release around ¥2 trillion of long-term liquidity into the market, providing additional support for economic recovery.
This round of RRR and interest rate cuts has resulted in several positive outcomes:
Increasing banks’ available funds: Lowering the RRR means commercial banks will have fewer funds locked by the central bank, allowing them more flexibility with their capital, helping ease liquidity pressures.
Ensuring sufficient liquidity: The RRR and rate cuts will ensure ample liquidity in the market and reduce overall financing costs, thereby stimulating domestic demand and promoting consumption and investment growth.
Easing quarter-end pressures: With September marking the end of the quarter, financial institutions often face increased liquidity needs and rising funding costs. The central bank’s action at this time helps alleviate financial pressures on institutions, businesses, and households, creating a supportive monetary environment for economic recovery.
TradFi Market Response
Following the policy announcement, the market showed a strong positive response. On September 24, key A-share indexes saw a sharp rise, with more than 5,100 stocks gaining and fewer than 200 stocks declining. The total trading volume for the day surged to ¥971.3 billion($138.8 billion), up ¥420.3 billion($60.0 billion) from the previous session, reflecting investors' confidence in the new policy. By September 26, the Shanghai Composite Index had climbed back to 3,000 points. On September 27, the A-share market remained robust despite an opening session glitch on the Shanghai Stock Exchange, where order congestion and delayed transaction confirmations occurred. The market, however, swiftly returned to normal, with trading volumes in both the Shanghai and Shenzhen markets reaching ¥946.6 billion($135.2 billion) by midday.
Bitcoin Price Trends
Between 2020 and 2024, the percentage change in Bitcoin prices within 30 days following China's multiple cuts to the RRR indicates that Bitcoin prices typically rise after such reductions, although the degree and pattern of this rise can vary over time. Most periods show an upward trend, with increases peaking at 30-35%. However, there are notable fluctuations and exceptions, including some periods of price declines, especially during one cut that was nearly 25%. After the recent adjustment on January 24, 2024, Bitcoin prices surged, rising about 30% in 30 days, though this period coincides with the launch of spot bitcoin ETFs in the United States. While the long-term effects of this RRR cut and interest rate reduction are still under observation, it has already provided a strong boost to economic recovery in the short term, as reflected in the positive responses from the A-share market. We will be keenly watching the future trajectory of Bitcoin.
