How does it affect stocks, exchanges, and buildings?, Second implementation of reserve requirement reduction within the year

Release time:Apr 16, 2024 21:17 PM

Author | Du Chuan from First Financial

After a series of major moves such as interest rate cuts and optimizing real estate financial policies, the central bank has implemented its second reserve requirement reduction this year, firmly promoting sustained economic recovery and recovery.

On the evening of September 14th, the People's Bank of China announced that it had decided to lower the reserve requirement ratio for financial institutions by 0.25 percentage points on September 15th, 2023. After this reduction, the weighted average reserve requirement ratio of financial institutions is about 7.4%.

Market analysis suggests that this reserve requirement reduction is at a critical moment in the relay of economic recovery. Recently, the combination of macroeconomic policies has been decisively and continuously implemented, with continuous efforts in finance, taxation, real estate, and monetary policies. Market expectations have significantly improved, but the resilience of economic recovery still needs to be enhanced. The second round of reserve requirement reduction will continue to reflect the policy support effect.

After the comprehensive reserve requirement reduction is implemented, a large amount of liquidity will be released, which has an "inclusive" effect on major asset classes. How will it affect the stock market, real estate market, and exchange rate market?

About foreign exchange markets

Currently, domestically, the combination of macroeconomic policies has been decisively implemented, with continuous efforts in finance, taxation, real estate, and monetary policies. Abroad, the Federal Reserve's interest rate hikes are nearing completion, and the pressure on the depreciation of the renminbi against the US dollar has significantly weakened. This reserve requirement reduction will continue to have the effect of "consolidating the foundation and cultivating the foundation".

In market analysis, the reserve requirement reduction plays a supportive role in maintaining exchange rate stability. An industry expert told First Financial that the reserve requirement reduction has enhanced the stability of the banking system's funds, optimized the liquidity structure, activated market vitality, further consolidated the strength of monetary and credit support for entities, and created a suitable monetary and financial environment for the sustained recovery of the economy. The continuous improvement of fundamentals will ultimately be reflected in the exchange rate. On the other hand, the central bank does not engage in "flooding", the monetary policy has not relaxed, and market interest rates remain stable, effectively supporting the stabilization and recovery of the renminbi.

From historical experience, reserve requirement cuts have a positive incentive effect on the exchange rate market. According to statistics, out of the previous 8 reserve requirement reductions, the offshore market exchange rate has risen 5 times and remained relatively stable 1 time.

Among them, after announcing the reserve requirement reduction on July 9, 2021, the closing price of the RMB against the US dollar in the offshore market rose by 121 basis points on that day, activating market confidence. In line with the high-speed growth trend of imports and exports, a round of RMB appreciation began.

After announcing the reserve requirement reduction on March 20th this year, the closing price of the renminbi against the US dollar in the offshore market also rose by 125 basis points.

The above experts believe that this reserve requirement reduction will also support economic fundamentals, foreign exchange market fundamentals, and promote the recovery and strengthening of the RMB exchange rate.

About the stock market

In addition to benefiting the foreign exchange market, the reserve requirement reduction will enhance the motivation for financial market investors to increase their allocation.

"This reserve requirement reduction reflects the sustained efforts of macroeconomic policies, plays an important role in stabilizing the macroeconomy, helps to reverse market sentiment, and provides a more solid foundation for the long-term improvement of the capital market. Market analysts believe that reserve requirement reduction is a significant benefit, and from historical experience, financial market investors, including A-shares, have indeed benefited from it multiple times.".

Since the outbreak of the pandemic in 2020, there have been 8 rounds of reserve requirement reductions, and the overall performance of the stock and bond markets has been good. On the first day after the news was released, the stock market mostly strengthened. Among them, the Shanghai Composite Index has risen six times, with cyclical stocks such as banks, real estate, and steel benefiting significantly.

Especially after the reserve requirement reduction in April 2020, the A-share market opened up room for growth, forming a "small bull market". The Shanghai Composite Index rose from over 2900 points to its highest point of 3900 points, with an overall market increase of over 30%. The yield of treasury bond fluctuated in a narrow range, and the bond market remained stable; The addition of new funds has also significantly boosted the trading volume of the domestic bond market, activating market trading.

The person stated that the implementation of this reserve requirement reduction boot is expected to further boost investor confidence in the financial market, especially attracting investors to increase their allocation of equity assets and promoting sustained improvement in financial market performance.

Lowering reserve requirements is expected to further consolidate the upward trend of the real economy. The central bank lowered reserve requirements again in September, releasing medium - and long-term liquidity exceeding 500 billion yuan, effectively incentivizing financial institutions to increase their investment in entities. Macro indicators will show more positive changes, and the sustainability of the steady recovery of the economy will be further enhanced.

The price level is expected to moderately rebound. With the recovery of market confidence and further manifestation of policy transmission effects, the degree of economic circulation has improved, and inflation has shown positive changes recently. In August, the year-on-year CPI changed from negative to positive, and the year-on-year decline in PPI has converged for two consecutive months. This reserve requirement reduction has continued to enhance the momentum of financial support to expand domestic demand, which is conducive to further leveraging the early driving role of financial resources and supporting the sustained and moderate recovery of inflation indicators.

About the real estate market

For the purpose of this reserve requirement reduction, the People's Bank of China has clearly stated: in accordance with the decisions and deployments of the Party Central Committee and the State Council, we will accurately and effectively implement a prudent monetary policy, maintain reasonable and sufficient liquidity, maintain reasonable credit growth, match the growth rate of money supply and social financing scale with the same economic growth rate, better support key areas and weak links, balance internal and external factors, maintain basic exchange rate stability, firmly support the sustained recovery and improvement of the real economy, and promote the effective improvement of quality and reasonable growth of quantity in the economy.

Chen Wenjing, Director of Market Research at Zhongzhi Research Institute, told First Financial that from the perspective of the impact of reserve requirement reduction, on the one hand, it provides more long-term funds for the market, increases liquidity, helps reduce capital costs, further boosts market confidence, and helps promote macroeconomic recovery; On the other hand, it will also have a positive impact on the real estate industry. The stable and positive macroeconomic situation is conducive to driving the expected improvement of the real estate market. At the same time, the reasonable funding needs of homebuyers and enterprises are also expected to receive better support.

Since September, the pace of optimizing policies across the country has accelerated. According to the monitoring of the China Index, as of the 13th, more than 30 provinces and cities have issued more than 40 policies. The "city specific policies" in core cities have increased, and multiple second tier cities have completely lifted purchase and sales restrictions. Coupled with this reserve requirement reduction, the real estate market is expected to further recover. In the short term, driven by multiple favorable policies, it is expected that the market activity of core first and second tier cities will increase, thereby driving the national real estate market to gradually build a bottom and stabilize.

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