The central bank announced that on September 27th, the reserve requirement ratio for financial institutions was reduced by 0.5 percentage points; the interest rate for the 7-day reverse repurchase operation in the open market was adjusted from the previous 1.70% to 1.50%, with a rate cut of 20 basis points.

On the third day following the official announcement of a package of incremental monetary policies, the policy of lowering reserves and interest rates was implemented first.

On September 27th, the People's Bank of China (hereinafter referred to as "the central bank") announced that the reserve requirement ratio for financial institutions would be reduced by 0.5 percentage points starting immediately (excluding financial institutions that have already implemented a 5% reserve requirement ratio). After this adjustment, the weighted average reserve requirement ratio for financial institutions is approximately 6.6%.

At the same time, the central bank's open market operations announcement stated that in order to increase the counter-cyclical adjustment of monetary policy and support stable economic growth, starting from September 27th, the interest rate for the 7-day reverse repurchase operation in the open market was adjusted from the previous 1.70% to 1.50%, with a rate cut of 20 basis points (BP).

"The rapid implementation of this reserve requirement ratio reduction and interest rate cut is a specific implementation of the deployment on September 26th by the Central Political Bureau meeting to 'reduce the reserve requirement ratio and implement a strong interest rate cut'," said Wang Qing, Chief Macro Analyst at Orient Jincheng.

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After the opening on September 27th, the A-share and Hong Kong stock markets continued to rise. During this period, there was an abnormality in the stock bidding transaction of the Shanghai Stock Exchange, which was slow in transaction confirmation, and the market joked that the system was "overwhelmed by the stock market boom."

After the market closed on the 27th, the Shanghai Stock Exchange announced, "After the opening today, there was an abnormal situation in the stock bidding transaction of this exchange, which was slow in transaction confirmation and affected the transaction. After disposal, the stock bidding transaction gradually resumed at 11:13. The exchange deeply apologizes for the occurrence of this abnormal situation."As of the close on September 27th, the ChiNext Index of A-shares surged by 10%, marking the largest single-day gain in history, with a transaction volume reaching 439.464 billion yuan, also setting a new historical record; the Hang Seng Index closed up by 3.55%, breaking through the 20,000-point threshold, with a full-day transaction volume of 445.748 billion Hong Kong dollars, hitting a historical high. In addition, the Shanghai Composite Index closed up by 2.88%, approaching the 3,100-point threshold, and the Shenzhen Component Index closed up by 6.71%.

Trillion-long-term liquidity released by reserve requirement ratio (RRR) cut

Since September 24th, when the central bank, the State Financial Regulatory General Administration, and the China Securities Regulatory Commission announced a series of incremental policies, A-shares and Hong Kong stocks have seen significant increases for four consecutive trading days. As of now, the Shanghai Composite Index has accumulated a year-to-date increase of 3.78%, erasing all the losses since the beginning of the year; the Hang Seng Index has risen by more than 21% year-to-date, catching up with the Nasdaq's gain during the same period.

Ming Ming, Chief Economist at CITIC Securities, stated, "The overall RRR cut and interest rate reduction this time are in line with the policy stance expressed at the press conference on September 24th and meet market expectations."

Regarding the RRR cut, Central Bank Governor Pan Gongsheng said at the aforementioned press conference that the RRR cut is expected to release 1 trillion yuan in long-term liquidity.

Currently, the weighted average reserve requirement ratio for financial institutions is about 6.6%. Pan Gongsheng indicated that this level still has some room for comparison with the central banks of major economies internationally. Before the end of the year, depending on the market liquidity situation, the central bank may further cut the RRR by 25BP-50BP.

In Wang Qing's view, this RRR cut has two direct effects: First, as the current period is a peak for government bond issuance, the central bank's RRR cut allows banks to allocate more funds to purchase government bonds, supporting the smooth issuance of government bonds. The funds raised from government bonds will be used to expand investments and stimulate consumption, with the current focus on supporting large-scale equipment upgrades and the exchange of durable consumer goods for old ones; second, the RRR cut can directly support bank lending in the fourth quarter. It is expected that banks will increase credit allocation in the fourth quarter, which will reverse the significant year-on-year decrease in new RMB loans in the first eight months and is an important point of effort to boost economic growth momentum at present.

"Considering that financial institutions that have already implemented a 5.0% reserve requirement ratio have not carried out RRR cuts, this means that the current lower limit for the reserve requirement ratio is 5.0%, that is, there is still a 1.6 percentage point reduction space for the reserve requirement ratio. If it is reduced by 0.5 percentage points each time, it can be reduced by about 3 to 4 times more," Wang Qing said.

In addition, Ming Ming mentioned that the RRR cut announcement this time mentioned "The People's Bank of China adheres to a supportive monetary policy stance, increases the intensity of monetary policy regulation, improves the precision of monetary policy regulation, and creates a good monetary and financial environment for the stable growth and high-quality development of the Chinese economy." Compared with the "to consolidate and enhance the economic recovery and upward trend" expression in the RRR cut announcement in February this year, the attitude towards the supportive stance of monetary policy is more explicit.

The interest rate cut is the largest in nearly four years.In terms of policy interest rates, this time there was a one-time interest rate cut of 20 basis points (BP), which is the largest single cut since 2021. Pan Gongsheng expects that this interest rate cut will lead to a reduction of about 30 BP in the Medium-term Lending Facility (MLF) interest rate, which will then guide the Loan Prime Rate (LPR) and deposit interest rates to decline by 20 BP to 25 BP.

According to the central bank's announcement, the operation interest rates for the open market's 14-day reverse repo and temporary positive and reverse repo continue to be determined by adding or subtracting points to the open market's 7-day reverse repo operation interest rate, with the addition or subtraction point range remaining unchanged.

On the same day, the central bank carried out a 292 billion yuan 14-day reverse repo operation, with the operation interest rate dropping from 1.85% of the previous trading day to 1.65%. Mingming stated that the overnight positive and reverse repo interest rates will respectively decline to 1.3% and 2%, and the newly established interest rate corridor range width has not changed.

In addition, on September 25, the central bank announced that it had carried out a 300 billion yuan MLF operation, with the winning interest rate dropping from 2.3% of the previous month to 2.0%.

Ye Yindan, a researcher at the Bank of China Research Institute, said that the Central Political Bureau meeting on September 26 released signals that the policy will comprehensively increase the strength of counter-cyclical regulation, and the comprehensive implementation of macro policies will help promote the gradual recovery of domestic demand, continuous improvement of expectations and confidence, and the recovery of economic prosperity. The annual growth target of around 5% is expected to be achieved.