Since the outbreak of the New Coronary Pneumonia epidemic, major central banks around the world have offered super quantitative easing policies, especially in Europe and the United States. With the recent sharp fluctuations in European and American stock markets, the loose monetary policies of the relevant countries have reached an unprecedented level. In addition to lowering interest rates, the Fed also announced an unlimited debt purchase plan on March 23, which includes restarting the commercial paper financing mechanism used during the 2008 financial crisis.
Compared with the drastic and aggressive advancement of foreign monetary policy in financial markets, China ’s monetary policy adjustment is more focused on the real economy. Since the regulatory authorities have taken preventive policies on the stability of the financial market before, since the outbreak of the outbreak, China’s financial market has emerged from a wave of stable markets independent of the European and American markets. This has won valuable space for the People’s Bank of China to adopt an independent monetary policy. On March 27, the Politburo meeting demanded to resolutely fight the three major battles, increase macro-policy hedging, effectively expand domestic demand, do a good job of the “six stability”, and strive to complete the year ’s economic and social development goals and tasks to ensure a comprehensive victory. To build a moderately prosperous society and fight against poverty and tackle tough targets. On March 31, the executive meeting of the State Council called for further implementation of targeted reductions to small and medium-sized banks, guiding all small and medium-sized banks to obtain loans, providing loans to small and medium-sized enterprises with a wide range of preferential interest rates, and supporting the expansion of agricultural and foreign trade. And the credit issuance of industries heavily affected by the epidemic.
In order to implement the spirit of the Politburo meeting and the executive meeting of the State Council, the People ’s Bank of China carried out open market operations through reverse repurchase to increase liquidity supply while lowering the interbank market interest rate. On March 30 and March 31, two 50 billion reverse repurchase, the bidding interest rate fell from the previous 2.4% to 2.2%. The market expects that the MLF interest rate and LPR quotation will be lowered by 0.2 percentage points in mid-April, which will further reduce the financing cost of the real economy. On April 3, the People’s Bank of China decided to lower the deposit reserve ratio by 1 percentage point for small and medium-sized financial institutions such as rural credit cooperatives, and released a total of about 400 billion yuan in long-term funds.
In addition to the regular interest rate cuts, the People ’s Bank of China also lowered the interest rate on excess deposit reserves of financial institutions from the central bank from 0.72% to 0.35% as of April 7. . The last time the deposit reserve interest rate was lowered was during the financial crisis in November 2008, 12 years ago. Before this adjustment, the statutory deposit reserve interest rate and excess reserve deposit interest rate were 1.62% and 0.72%, respectively. After the adjustment, the interest rate of the statutory deposit reserve remained unchanged, and the spread between the statutory deposit reserve and the excess deposit reserve expanded to 1.27 percentage points.
There are at least two effects of reducing the legal deposit reserve. First, encourage banks to issue loans, purchase bonds, and expand asset scale. According to statistics, as of the fourth quarter of 2019, the excess reserve ratio of Chinese commercial banks was 2.4%. Although the excess reserve ratio is usually at a low point in the year in the first quarter, affected by the epidemic should be at a relatively high level this year. After the RRR cut, banks’ demand for statutory deposit reserves declined. Through asset expansion, some excess reserves can be converted into statutory deposit reserves, and the overall profitability of the reserves can be improved.
Secondly, avoid the bank’s adverse selection behavior. The original intention of the reserve interest payment is to increase the bank ’s fund income and maintain the bank ’s sufficient liquidity. However, with the compression of deposit and loan spreads and the expansion of market risks, banks’ demand for reserve assets may increase further. The excess reserve interest rate between the adjustments is 0.72%, and the benchmark interest rate for bank demand deposits is only 0.35%. Marginally, there is a risk-free arbitrage space for banks to deposit the absorbed demand deposits with the central bank. Although the absolute level of the 0.37% spread is limited, it may encourage financial institutions to reverse their choices in the face of rising market risks. This is the reason for the negative interest rates adopted by Japan and other countries for excess reserves. In fact, from the perspective of protecting the liquidity of commercial banks and encouraging banks to expand their asset business, they can further reduce the interest rate of excess reserve requirements, increase the interest rate of statutory reserve requirements, and widen the spread between them.
There are at least two effects of reducing the legal deposit reserve.
Secondly, avoid the bank’s adverse selection behavior. The original intention of the reserve interest payment is to increase the bank ’s fund income and maintain the bank ’s sufficient liquidity. However, with the compression of deposit and loan spreads and the expansion of market risks, banks’ demand for reserve assets may increase further. The excess reserve interest rate between the adjustments is 0.72%, and the benchmark interest rate for bank demand deposits is only 0.35%. Marginally, there is a risk-free arbitrage space for banks to deposit the absorbed demand deposits with the central bank. Although the absolute level of the 0.37% spread is limited, it may encourage financial institutions to reverse their choices in the face of rising market risks. This is the reason for the negative interest rates adopted by Japan and other countries for excess reserves. In fact, from the perspective of protecting the liquidity of commercial banks and encouraging banks to expand their asset business, they can further reduce the interest rate of excess reserve requirements, increase the interest rate of statutory reserve requirements, and widen the spread between them.
In fact, in addition to conventional monetary policies such as interest rate cuts, RRR cuts, and open market operations, monetary policy should focus on policy tool innovation during critical periods.
First, in dredging monetary policy transmission channels and realizing precise drip irrigation of credit supply, we should actively play the role of new tools such as digital finance and channels. Guide financial institutions to increase their support for the real economy, especially small and micro, private enterprises. For SMEs, due to lack of necessary collateral, the problem of information asymmetry is more serious. With the help of fast-developing information technology, through accelerating the development of financial technology innovation, it can enrich the financing channels of SMEs. Compared with other countries, China has more developed e-commerce platforms, which are connected to millions of small and medium-sized enterprises. Through the transaction data of these enterprises, the e-commerce platform can grasp the daily operating conditions of these enterprises, which has laid an information foundation for the expansion of new financial channels. This huge advantage is unmatched by foreign financial institutions. In the next step, we can actively develop a financial platform based on e-commerce as a supplement to traditional commercial banks.
Second,Encourage financial institutions to innovate financial products. The biggest impact of the epidemic on the economy is the suspension of supply and demand activities. Similar to the “transaction counterparty risk” that existed in the financial markets during the 2008 crisis, there are corresponding risks within the real economy. Economic activities are in a state of suspension, business credit risk is rising, the demand for cash transactions by companies is increasing, and the internal commercial credit of the real economy has been hit hard. In the upstream and downstream industrial chains, it may even happen that core enterprises are crowding up the upstream and downstream SMEs ‘funds, resulting in difficulties for SMEs’ experience. Financial institutions should be encouraged to develop supply chain financial products such as orders, warehouse receipts, and accounts receivable financing to provide financing services to SMEs.
Third, the central bank’s monetary policy tool innovation. Encouraging financial institutions to innovate financial products to provide financing services to SMEs also requires the central bank to innovate the corresponding supporting systems and tools. Only by developing appropriate new monetary policy tools, creating risk diversification and refinancing mechanisms for financial institutions, and mobilizing the enthusiasm of financial institutions, can we achieve twice the result with half the effort.
Second,Encourage financial institutions to innovate financial products. The biggest impact of the epidemic on the economy is the suspension of supply and demand activities. Similar to the “transaction counterparty risk” that existed in the financial markets during the 2008 crisis, there are corresponding risks within the real economy. Economic activities are in a state of suspension, business credit risk is rising, the demand for cash transactions by companies is increasing, and the internal commercial credit of the real economy has been hit hard. In the upstream and downstream industrial chains, it may even happen that core enterprises are crowding up the upstream and downstream SMEs ‘funds, resulting in difficulties for SMEs’ experience. Financial institutions should be encouraged to develop supply chain financial products such as orders, warehouse receipts, and accounts receivable financing to provide financing services to SMEs.
Third, the central bank’s monetary policy tool innovation. Encouraging financial institutions to innovate financial products to provide financing services to SMEs also requires the central bank to innovate the corresponding supporting systems and tools. Only by developing appropriate new monetary policy tools, creating risk diversification and refinancing mechanisms for financial institutions, and mobilizing the enthusiasm of financial institutions, can we achieve twice the result with half the effort.
(Author Fan Zhiyong is a researcher and professor at the School of Economics, National Institute of Development and Strategy, Renmin University of China)