China's Central Bank Signals More Rate Cuts Amid Economic Slowdown, RRR to Drop by 50 BPS

The People's Bank of China plans to cut the reserve requirement ratio by 50 basis points, with further reductions expected by year-end. Governor Pan Gongsheng suggested additional rate cuts, including a reduction in the 7-day repurchase rate, as part of efforts to boost China’s slowing economy.

PBOC Governor Hints at Further Rate Cuts, Including 7-Day Repo Rate and Loan Prime Rate

In a report by CNBC, during a press conference on September 24, People's Bank of China Governor Pan Gongsheng announced that the reserve requirement ratio, or RRR, the quantity of cash banks are required to maintain on hand, will be reduced by 50 basis points.

Pan, who reporters interviewed in the presence of two other financial regulator chiefs, did not specify the precise date the central bank would relax its policy; however, he did state that it would occur shortly. Pan also said that, depending on the current circumstances, there may be an additional 0.25 to 0.5 basis points reduction by the end of the year.

Additionally, he stated that the PBOC would decrease the 7-day repurchase rate by 0.2 percentage points.

After Pan's inaugural remarks, China's 10-year government bond yield reached a record low of 2%.

During the subsequent press conference, he also indicated that a 0.2-0.25% reduction in the loan prime rate is feasible, but he did not specify whether he was referring to the one-year or five-year LPR. The PBOC maintained its primary benchmark lending rates at the monthly fixing on September 20.

Pan also stated that the central bank's website would host the official policy pronouncements, but he did not provide a specific date.

The uncommon high-level press conference was scheduled after the U.S. Federal Reserve's reduction in interest rates last week. This initiated an easing cycle, which provided the Chinese central bank with additional flexibility to reduce its rates and stimulate growth in response to deflationary pressure.

PBOC Governor Pan Signals Further RRR Reductions as China Faces Economic Slowdown and Low Confidence

In July 2023, Pan assumed the role of governor of the PBOC. During his inaugural press conference as central bank governor in January, Pan announced that the PBOC would reduce the reserve requirement ratio (RRR). These policy announcements are seldom issued during such events and are typically disseminated through state media and internet releases.

In March, concurrent with China's annual parliamentary meeting, he informed reporters that there was potential to reduce the RRR further. This reduction is widely anticipated to occur in the upcoming months.

The PBOC regulates monetary policy using diverse rates, in contrast to the Fed's emphasis on a single interest rate. On September 20, the PBOC did not alter the loan prime rate, a benchmark that impacts corporate and household loans, including mortgages.

Additionally, China's government system establishes policies at a significantly higher level than those of the financial regulators who addressed the audience on September 24. In July, these high-level meetings emphasized the necessity of achieving full-year development objectives and bolstering domestic demand.

In the days following the Fed's reduction, the PBOC maintained the loan prime rate at the same level. However, it has since reduced the short-term rate, determining the money supply. On September 23, the PBOC lowered the 14-day reverse repo rate by ten basis points to 1.85%. However, the 7-day reverse repo rate, reduced to 1.7% in July, was not touched. Pan has expressed his desire for the 7-day rate to be established as the primary policy rate.

The decline in real estate decline and low consumer confidence contributed to China's economic slowdown. Economists have advocated for additional stimulus, particularly in the fiscal sector.