China's Central Bank Mulls to Cut Reserve Ratio to Boost Economy

The People’s Bank of China (PBOC) is considering further reductions in commercial banks' reserve requirement ratio (RRR) in the fourth quarter to strengthen the economy. Governor Pan Gongsheng announced this plan during the Financial Street Forum in Beijing, stating that the central bank aims to lower the ratio by 0.25 to 0.5 percentage points based on liquidity conditions.

The reserve requirement ratio refers to the amount of cash that commercial banks must retain as reserves. The last reduction in the RRR occurred as part of a comprehensive set of policies introduced at the end of September.

During the forum, Pan highlighted three key factors influencing the central bank’s policy decisions:

Need for Strong Support: He emphasized that the current economic situation necessitates robust macroeconomic support. The government's commitment to implementing additional policies shows a determination to stabilize the economy, enhance consumer confidence, and improve market responses. Challenges in Property and Capital Markets: Pan noted that there are ongoing issues in the property and capital markets that require targeted policies, drawing from both international experiences and China's historical practices. Macroprudential Risk Assessment: The central bank will focus on evaluating risk accumulation from a macroprudential perspective.

On the same day, commercial banks announced reductions in deposit rates. Earlier in the week, the PBOC, along with financial regulatory bodies, held a joint meeting with key financial institutions to expedite the implementation of various pro-growth measures.

Pan also reaffirmed the importance of achieving a reasonable recovery in prices, stating that it is a significant factor in policy formulation. The central bank plans to utilize price-based regulatory tools, such as interest rates, effectively.

Additionally, the PBOC aims to expand its monetary policy toolkit, increasing treasury bond trading in open market operations. A joint working group has already been established with the Ministry of Finance to facilitate bond trading.

In terms of improving transmission mechanisms, Pan committed to enhancing the transparency of monetary policies and boosting the pricing capabilities of financial institutions, ensuring alignment with fiscal, industrial, and regulatory policies.

Economic expert Zhang Zhiwei noted the importance of normalizing inflation as part of the monetary policy framework, indicating that the government is taking deflationary pressures seriously. He suggested that a similar statement from the Politburo in their next meeting could signal an increase in fiscal stimulus next year.

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