The People’s Bank of China cut the reserve requirement ratio by 0.5 percentage points for all financial institutions, except those that have implemented a 5 percent reserve ratio, on Friday, and adjusted the interest rate for its open market seven-day reverse repurchase operation from 1.7 percent to 1.5 percent.
The move, according to China’s central bank, would free up to 1 trillion yuan ($142.44 billion) for new lending, and leaves the door open to another cut later this year.
Given the rising macroeconomic growth pressure, high financing costs of the real economy, and the lack of market confidence, the central bank’s move to cut the RRR and lower the interest rate will have positive implications.
Cutting the RRR, along with lowering the interest rate for medium-term lending facility, and using other monetary tools, can further lower interest rates.
The significant reduction in policy interest rates reflects supportive monetary policy characteristics and intentions, and is aimed at reducing the financing costs of the real economy.
The central bank’s move sends a positive signal to the market, which will help boost market players’ confidence and reduce potential market risks, stabilizing growth.
Thanks to the cumulative effects of multiple policies, China’s A-share market rebounded recently, leading to a growth of both the stocks and foreign exchange markets. The Shanghai Composite Index has crossed the 3,000-point mark, with the midpoint price of the renminbi against the US dollar approaching 7. With continued release of policy dividends, along with the steady recovery of market confidence, investment is expected to stabilize. That in turn will help stabilize the operation and healthy development of the capital market.
Consequently, the A-share market is expected to play its due role in resource allocation, promoting the development of the real economy, thus justifying the cutting of RRR and lowering of interest rates. With the authorities planning to issue bonds worth about 2 trillion yuan this year to promote growth, macroeconomic policy will have a more profound impact on China’s economy.
– 21ST CENTURY BUSINESS HERALD