Does Lowering The Deposit Rate Mean Policy Change?

This is a surprising piece of news:

On the evening of November 30th, the central bank announced that the deposit reserve ratio of deposit financial institutions should be reduced by 0.5 percentage points from December 5th.

This is the first time the central bank has lowered the deposit reserve ratio in the past three years.

From January 18, 2010 to June 20, 2011,

Direct reason: to ease the tight liquidity of the banking system.

"The direct reason for the reduction of the deposit reserve ratio is to ease the tight liquidity of the banking system, which fully reflects the pertinence, flexibility and foresight of monetary policy," said Ba Shu song, deputy director of the Financial Research Institute of the State Council Development Research Center and the first economist of the China Banking Association.

Lian Ping, chief economist at Bank of communications, believes that the current banking sector is tight and more and more banks have more than 75% of the loan to deposit ratio.

The central bank requires financial institutions to increase credit for small and micro enterprises that conform to industrial policies and "weak links" such as "agriculture, rural areas and farmers", so as to meet the capital needs of the state's key construction and renewal projects, and support the construction of affordable housing projects.

"The lowering of the deposit reserve rate can release 400 billion yuan of funds, which is conducive to enhancing the lending ability of banks." Lian Ping said, "considering that the amount of credit will be larger in January next year, it is likely to exceed 1 trillion yuan. Now, lowering the reserve ratio reflects the foresight of monetary policy."

On the other hand, the new changes in liquidity also make it feasible to reduce the deposit reserve ratio.

First, with the decrease in cross-border capital and the narrowing of the trade surplus in China, foreign exchange accounted for a net decrease of 24 billion 892 million yuan in October, the first decline in foreign exchange holdings since December 2007.

Foreign exchange is the national currency that the central bank buys foreign exchange assets, and the increase in foreign exchange will directly increase the base money and increase the RMB in circulation through currency multiplier effect.

"The central bank raised the deposit reserve ratio, which is intended to hedge the new liquidity brought about by foreign exchange growth.

Today, the decline in foreign exchange reserves will reduce the supply of market liquidity, and also open up the room for reducing the deposit reserve ratio, "said Ba Shu song.

Secondly, in the last two or three months, the number of central bank bills has been greatly reduced, easing the central bank's currency hedging pressure and making it possible to reduce the deposit reserve ratio.

Release signal: experts believe that steady growth will be placed in a more important position.

Nowadays, under the combined action of a series of policies and measures, the momentum of excessive inflation has been initially curbed, and the policy effect has gradually emerged.

"CPI growth has dropped for three consecutive months, and we expect that CPI growth in November may be less than 4.5%," he said.

At the same time, although the internal driving force of China's economic growth is still strong, the external environment is very complex, especially the European sovereign debt crisis escalating, and the negative impact on China's economic growth may continue to emerge.

"The PMI index, which will be released in the near future, may be lower than the watershed divide of 50. If so, it will be the first decline in PMI index to less than 50 in 23 months," Bason said.

"Under such circumstances, the reduction of the deposit reserve rate has released a signal that we will further deal with the relationship between maintaining steady and rapid economic development, adjusting the economic structure and managing inflation expectations, of which steady growth will be placed in a more important position".

Policy orientation: or will be phased and structural relaxation under the keynote of prudent monetary policy.

Does lowering the deposit reserve ratio mean that a robust monetary policy is starting to turn?

Ba Shu song believes that lowering the deposit rate reflects the timely adjustment of monetary policy in a timely manner, but it does not mean that the tone of monetary policy has changed.

"In the global environment of extremely loose monetary conditions will continue, the domestic demand expansion in the previous two years is relatively fast, and the stock of money is large, the future price trend is still uncertain, and the basis for price stability is not strong enough.

We expect that the CPI increase will be 3.5% to 4% next year, and this is also a low rise. We need to continue to adhere to a prudent monetary policy, "he said." however, the reduction of deposit rate indicates that in the fourth quarter of this year and the first quarter of next year, the Chinese economy will slow down and "hit bottom". The central bank will make some phased and structural relaxation under the framework of prudent monetary policy.

Future forecast: some experts believe that by the end of next year, the deposit rate will be lowered within 5 times.

Will the reserve rate continue to fall?

Lian Ping believes that for the sake of steady growth, the increments of credit will be more than that of this year, so the deposit reserve rate will be reduced by 5 times or 0.5 percentage points by the end of next year.

Ba Shu Song said that if the European and American countries launched the new quantitative easing policy in the future, the foreign exchange occupation also changed the situation which obviously reduced, the deposit reserve ratio's reduction space was not big, otherwise might possibly continue to reduce.

"It depends on the state of liquidity change".

"As far as interest rates are concerned, it is unlikely that the interest rate will be cut down. On the contrary, if prices remain high next year, because the monetary authorities can not tolerate the negative interest rate for a long time, we can not rule out the possibility of raising interest rates," Bason said.