Photo by Mitchell Luo on Unsplash, this article is from WeChat public account: Suning WealthInsights , author: Tao Jin

Now the environment facing policymakers is more and more like the “Great Depression” 90 years ago. The effectiveness of monetary policy has been tested more and more, and the liquidity trap is approaching.

Today is the day when the central bank officially lowers its quota. Three days ago, the central bank issued an announcement and decided to implement the inclusive financial target reduction on March 16, 2020, which will lower the target for banks that meet the assessment criteria by 0.5 to 1 percentage point. In addition, additional qualified target for joint-stock commercial banks Reduced by 1 percentage point.

Specifically, the central bank recently completed the annual assessment of the inclusive financial target reduction in 2019. Some compliant banks have changed from the original reserve ratio discount to 0.5 percentage point reserve discount. Percentage discount becomes 1.5%. Generally speaking, the targeted reduction of these qualified banks was 0.5 to 1 percentage point.

With the RRR cut, it is imperative to cut interest rates in the future. We predict that in the past few days, the central bank’s open market operating interest rate (MLF) is more likely to be lowered. The MLF interest rate is the spear of the benchmark loan rate LPR, so the LPR on the 20th of this month will also fall. But if the open market operation interest rate is unchanged, the probability of LPR fallingWill decrease.

The role of downscaling

The RRR cut refers to the reduction of the reserve ratio of commercial banks by the central bank. Generally speaking, in order to guarantee the needs of customers of commercial banks to withdraw deposits and liquidate funds, after obtaining deposits, banks must deposit a certain percentage of funds into the central bank in accordance with regulations. This ratio is the reserve ratio. At present, the reserve ratio of large banks is 12.5%, which means that for every 100 yuan increase in deposits, the bank must deposit 12.5 yuan into the central bank.

Lowering the reserve ratio allows banks to use more deposits for loan operations. After these increased loans were granted to enterprises, a large part of them turned into bank deposits again, which further increased liquidity in the economy through so-called currency multipliers.

In theory, these funds will be used by banks to lend to real enterprises. However, the current channel in China’s banking system from the liquidity of the banking system to the credit of the real economy is not completely smooth. Many funds are not used to lend to enterprises. Therefore, the Central Bank increased the effect of the RRR cut to support the real economy, and established a targeted RRR cut, that is, the small and medium-sized banks such as county-level rural commercial banks that are more focused on serving the real economy.

In addition, after the RRR cut, the bank’s capital was loosened, and LPR was reduced. After the interest rate is reduced, the financing cost of the real economy is reduced, which in turn stimulates corporate investment and further stimulates economic growth.

The RRR cut can be said to be a relatively strong loose monetary policy, because each time the RRR cut will release hundreds of billions of yuan of funds. Taking the current RRR cut as an example, about 550 billion yuan of long-term funds have been released. These funds can be used as the base currency to create more funds in the banking system.

Why the accuracy is lowered at this time

The policy intent of the RRR cut is clear. The central bank clearly requires that the RRR cut funds be used to issue loans to the inclusive financial sector, thereby increasing credit support for inclusive financial sectors such as small and micro enterprises and private enterprises. In the current situation of violent global market fluctuations, unknown epidemic evolution and increased panic, the central bank strengthened countercyclical adjustments in a timely manner and injected incremental long-term funds in a timely manner.

In recent years, China ’s monetary policy has been less affected by the global wave of interest rate cuts, and the central bank has maintainedWith strong policy determination and timely determination. But the current economic environment is significantly different from before. Under the pressure of many parties, the need for monetary policy to remain slightly loose in the short term is increasing.

As for the target reduction, why the additional reduction for joint-stock banks? This aspect is to improve the “three gears and two excellent” differentiated deposit reserve ratio adjustment framework, and encourage joint-stock banks and city commercial banks to further support the real economy. On the other hand, in order to take care of the narrowing net interest margin of these banks: the deposit interest rate is always the same, the loan interest rate is continuously reduced with the easing policy, and the operating and risk control pressures of small and medium banks are still hanging on their heads. Reduce their operating costs.

Interest rates continue to fall

After monetary easing, it is also necessary to lower the LPR of interest rate policies led by MLF and other policies. In the announcement of the RRR cut, the central bank clearly put forward the requirements for a noticeable decline in future loan interest rates.

It is worth emphasizing that the reduction of LPR should be based on the reduction of interest rates on policies such as reverse repurchase and MLF. In particular, the reduction of reverse repurchase plays a key role in reducing the actual effect of LPR.

Because MLF is the mid-end policy interest rate, regulating mid-end liquidity and the bank’s medium-term capital costs will not change the starting point of bank capital costs-short-end interest rates. The simple reduction of MLF does not fundamentally reduce the cost of bank funds. At this time, the reduction of LPR will only reduce the bank’s interest spread. Banks are naturally unwilling. They can give greater benchmark interest rates to the loans of most physical enterprises. Upscale.

This kind of interest rate cut is likely to fail to reduce the financing cost of the real economy. In fact, in recent months, both the reverse repo and MLF interest rates are also in a downward channel.

The hidden worry behind easing

Today, the environment facing decision makers is increasing.More and more like the Great Depression of the 1930s, the effectiveness of monetary policy has been tested more and more.

In the crisis 90 years ago, economist Keynes said: “You can take a horse to the river, but you can’t force it to drink water.” This sentence means, Policy The authorities continue to “water release”, implement extremely loose monetary policy, and interest rates have dropped to extremely low levels, but companies are reluctant to use this money to invest in business, and the real economy is still a dead end.

Keynes also cited a simple capital market to illustrate the situation: there is only one type of investment in the market-bonds. However, when the interest rate is extremely low, the bond price is extremely high, and the yield is also extremely low. People believe that the bond price will definitely fall, and no longer buy bonds, while holding cash, the most liquid asset. At this time, no matter how much currency the central bank issues, it will be “absorbed” as liquidity, as if it fell into a “liquidity trap,” and monetary policy will be invalidated.

The current performance of the global market can already be seen. The U.S. Federal Reserve cut interest rates sharply and the European Central Bank skipped interest rate cuts and immediately started quantitative easing. However, global capital markets continued to fluctuate sharply and kept falling.

With the global tide of further interest rate cuts, China is likely to become the only country in the world that persists in resisting negative interest rates. Currently, the U.S. federal benchmark interest rate is 1% -1.25%, the British benchmark interest rate is 0.25%, the European deposit interest rate is -0.5%, and the Bank of Japan interest rate is -0.1%. Still reached 3.15%. In monetary policy, China has more room for adjustment, and we should cherish such space.

So how do you escape the “liquidity trap”? Monetary policy alone will definitely not work, and fiscal policy is needed. At the core of the Roosevelt New Deal was a large number of government purchases, including tax cuts, government investment in factories, and even government spending to hire labor to increase employment.

In fact, China is currently pursuing a more active fiscal policy. Recently, from the reduction and exemption of various taxes such as value-added tax, the periodical reduction of pensions, unemployment, industrial injury social insurance premiums, and deferred payment of provident funds, reduction of property rents, reduction of electricity and gas costs, reduction of financing costs, and reduction of transportation costs such as port transportation From the central to the local level, the package measures use “real gold and silver” to reduce the burden on enterprises and help them overcome difficult times. Anti-epidemic measures involving hundreds of billions of yuan are being implemented intensively.

However, I believe that direct government purchases are better than tax cuts . Because tax cuts are also a kind of “giving money,” similar to the effect of monetary policy. And politicsGovernment purchase is more direct to create demand and “warm up” the economy. The recent heated discussions between the old and new infrastructure are the side portrayal of the government’s recent efforts to purchase.

This article is from WeChat public account: Suning WealthInsights , author: Tao Jin