Event: On September 24, 2024, the State Council Information Office held a press conference on financial support for high-quality economic development. The conference announced a series of policies including the reduction of policy interest rates, reserve requirement ratio cuts, lowering of existing housing loan interest rates, and the unification of minimum down payment ratios for housing loans.
What are the highlights of macro policies at the press conference? Interest rate cuts, lowering of existing housing loan interest rates, and the creation of tools to stabilize the market.
The first major policy is the announcement of a 0.5 percentage point reduction in the reserve requirement ratio and a 0.2 percentage point reduction in the 7-day reverse repo operation interest rate. The reserve requirement ratio will be reduced by 0.5 percentage points in the near future, and there may be an additional reduction of 0.25 to 0.5 percentage points later in the year. The 7-day reverse repo operation interest rate will be reduced from the current 1.7% to 1.5%, which is expected to lead to a 0.3 percentage point reduction in the MLF rate, with the LPR and deposit interest rates also expected to decrease by 0.2 to 0.25 percentage points.
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The second major policy is to reduce the average interest rate on existing housing loans by about 0.5 percentage points and to unify the minimum down payment ratio for first and second housing loans to 15%. President Pan stated that commercial banks are guided to reduce the interest rates on existing housing loans to near the level of newly issued loans, with an expected average reduction of about 0.5 percentage points, and the minimum down payment ratio for second housing loans nationwide will be reduced to 15%. Regarding the net interest margin issue of commercial banks, President Pan emphasized that the impact is generally neutral. At the same time, the state plans to increase core tier-one capital for six large commercial banks.
The third major policy is the creation of new monetary policy tools to support the stable development of the stock market. The first is the creation of a swap facility for securities, funds, and insurance companies, supporting eligible securities, funds, and insurance companies to obtain liquidity from the central bank through asset pledges, which will greatly enhance the institutions' ability to obtain funds and increase their stock holdings. The second is the creation of a special re-lending facility for stock buybacks and increases, guiding banks to provide loans to listed companies and major shareholders to support stock buybacks and increases.
Why release additional policies at this time? Economic growth recovery is still unbalanced, and the Federal Reserve's interest rate cut provides a good external condition.
The recovery of economic growth momentum is still unbalanced and insufficient, with exports and manufacturing investment relatively better, while consumption and the real estate industry chain growth lag behind the nominal GDP growth rate. From January to August, exports (in US dollars) and manufacturing investment increased by 4.6% and 9.1% year-on-year, respectively, both exceeding the nominal GDP growth rate for the first half of the year (4.1%); however, the total retail sales of social consumer goods and real estate development investment from January to August increased by 3.4% and -10.2% year-on-year, respectively, still below the nominal GDP growth rate for the first half of the year (4.1%).
The Third Plenary Session proposed that ensuring and improving people's livelihoods in development is a major task of Chinese-style modernization, and the financial sector is accelerating the implementation. One of the most significant differences between the Third Plenary Session's communiqué and the 20th National Congress report is the focus on livelihood-related expressions, listing the guarantee and improvement of people's livelihoods as a major task. Reducing the burden on residents, facilitating the release of residents' credit, and increasing residents' property income may be the direction of financial sector reform, and the financial regulatory policies are also clearly more inclined towards livelihood issues.
The Federal Reserve's interest rate cut provides a good condition for external balance, with the renminbi's exchange rate against the US dollar appreciating to around 7.04. With the Federal Reserve's interest rate cut of 50 basis points, China's international balance of payments environment has significantly improved. In terms of settlement and sale exchange rates, the settlement exchange rate has slightly improved, while the sale exchange rate has significantly retreated. Against the backdrop of improved international balance of payments, the renminbi's exchange rate against the US dollar has gradually appreciated.
What might be the impact of these additional policies? Alleviating the interest burden on residents and more focus on the capital market.The reduction in the interest rate for existing housing loans this time will save 150 billion yuan in interest expenditure, accounting for 0.3% of residents' disposable income, with a greater emphasis on easing the pressure of residents' interest expenditure. If calculated based on the average consumption propensity of residents in 2023 at 68.3%, the boost to residents' consumption may be around 100 billion yuan. Considering the total scale of residents' consumption in 2023 is 49.3 trillion yuan, the pull on consumption is about 0.2%.
The impact of this policy on the macroeconomy may still need to wait for subsequent synergistic effects with fiscal policy. The coordination between monetary and fiscal policies can refer to 2023, when the central bank reduced the statutory reserve requirement ratio by 25 basis points in September 2023, and the finance department announced an additional 1 trillion yuan in special treasury bonds in October. If similar policies are introduced this year, fiscal and monetary policies may work together to promote the macroeconomy to stabilize and rise.
The impact of this policy on the capital market may be underestimated. The central bank's creation of new tools may bring incremental funds, and the scale of equity held by securities, funds, and insurance may accelerate expansion. The two new tools created by the central bank can inject liquidity into the capital market. However, the current market risk preference is relatively low, and we expect that the incremental funds created through the central bank's tools may flow more into high dividend sectors.