On September 5, the Information Office of the State Council held a series of press conferences on the theme of "Promoting High-quality Development", which were attended by Lu Lei, Deputy Governor of the People's Bank of China, Li Hongyan, Deputy Director of the State Administration of Foreign Exchange, Zou Lan, Director of the Monetary Policy Department of the People's Bank of China, Peng Lifeng, Director of the Credit Market Department of the People's Bank of China, and Xiao Sheng, Director of the Capital Project Management Department of the State Administration of Foreign Exchange.

Structural transition: Reduced currency sensitivity

At present, the transformation of the economic structure is accelerating, and the sensitivity to monetary stimulus is gradually decreasing, prompting monetary policy to shift to a more neutral countercyclical adjustment model, that is, to adopt a "supportive" stance. The main downward pressure on the economy at this stage comes from two aspects: first, the export pressure caused by the deterioration of the external environment has increased; Second, the simultaneous deleveraging of the real estate and infrastructure sectors caused by weak domestic demand.

To cope with the export pressure, it needs to be balanced by boosting domestic demand for consumer durables. The lack of domestic demand caused by structural deleveraging is an inevitable pain in the process of upgrading the economy to "lightweight". Even greater monetary policy easing will not reverse the trend of economic transformation, but may introduce new systemic risks due to the diminishing effect of easing.

Lu Lei, deputy governor of the People's Bank of China, stressed that "the People's Bank of China will continue to adhere to a supportive monetary policy." At the same time, Director Zou Lan pointed out that "the structural transformation of China's economy is accelerating", and this change has led to a decline in the predictability and controllability of the money supply and its correlation with economic activities. Against this backdrop, it is unlikely that monetary policy will return to the path of large-scale easing.

The space for RRR reduction has been significantly opened, and the currency delivery method has been optimized

Improving the efficiency of volume transmission marks the arrival of the era of "demand-based supply", and also opens up room for further RRR cuts, and increases the need to replace medium-term lending facility (MLF) operations by buying and selling treasury bonds. Since the middle of the year, the People's Bank of China has accelerated its efforts to improve the monetary policy framework and build a modern central bank system.

In the process of improving the efficiency of quantitative transmission, the central bank is shifting from "supply to promote demand" to a new mechanism of "supply to determine supply". In the face of the decline in corporate and household borrowing demand caused by the simultaneous deleveraging of the real estate and infrastructure sectors, the current strategy of the central bank is to first observe the changes in the endogenous demand for credit financing in the real economy, and then decide how much liquidity to provide to the financial market, so as to achieve the dual purpose of stabilizing the financing demand of the real economy and preventing the idling and arbitrage of funds in the financial system.

Currently, the average reserve requirement ratio for financial institutions is 7%, while for large, medium and small banks it is 8.5%, 6.5% and 5.0% respectively.

Director Zou Lan pointed out that in the future, the focus on quantitative targets will gradually be reduced, and more will be used as observational, reference and expected indicators. This means that the central bank's operation of buying and selling Treasury bonds to replace MLF will not only not be misconstrued by the market as overly accommodative, but will also be more necessary because of its advantages such as extending the duration of base money and better managing short-, medium- and long-term liquidity. However, due to the limited position of government bonds held by the central bank, it will take a period of time for government bond purchases to form a large quantitative regulation and the impact of a reasonable steepening of the interest rate curve.

在此过渡期间，降准作为一种兼具长期流动性投放力度、效率和成本优势的操作手段，显得更为适宜。目前法定存款准备金率平均为7%，而降准下限为5%，两者间仍有较大空间可供使用。鉴于去年9月流动性投放已显紧张，自年初以来便预期今年9月将是合理降准时机，因此维持全面降准50个基点的预测不变，以确保合理的信用融资需求，并防止短期内资金面利率的上升。

Improve the efficiency of interest rate transmission and the net interest margin of commercial banks

In the process of improving the efficiency of interest rate transmission, the enhancement of the market-oriented nature of long-term interest rate pricing means that the net interest margin of commercial banks has changed from a passive result to an input variable for active management. Against the backdrop of limited room for deposit rate reduction and the weakening response of real estate market demand to monetary easing, the feasibility of significantly reducing the interest rate on existing housing loans is worth further discussion.

In the past, long-term policy rates have tended to be lowered more than short-term policy rates, which may lead to a continuous compression of banks' net interest margins, which in turn has led to a contradiction between rising non-performing loan ratios and declining profit-to-capital and provision capacity. Since July, the PBOC has accelerated the upgrading and restructuring of the interest rate transmission mechanism, weakened the policy attributes of the medium-term lending facility (MLF) interest rate and the loan prime rate (LPR), and established the 7-day reverse repo rate as the only policy rate tool that the central bank actively adjusts, so as to enhance the market-oriented nature of the interest rate transmission mechanism from short-term to long-term. This shows that the PBOC has fully recognized the importance of maintaining the net interest margin of commercial banks to maintain the systemic risk-bearing capacity of the financial system in the process of cooling the demand for credit financing in the real economy.

Director Zou Lan pointed out that "the speed of the diversion of bank deposits to asset management products, the degree of narrowing of bank net interest margins and other factors have limited the room for further downward movement of deposit and loan interest rates", which indicates that under the accelerated market-oriented interest rate transmission mechanism, the room for deposit interest rate reduction is limited, and maintaining the stability of net interest margin has become more important, thus reducing the feasibility of significantly reducing the interest rate of existing housing loans.

In addition, the current round of in-depth adjustment of the real estate market is mainly caused by long-term structural factors such as the acceleration of population aging and the imbalance of housing price to income ratio caused by the imbalance of industrial regional layout, rather than the tightening of monetary and financial conditions. As a result, the sensitivity of real estate demand to monetary easing has decreased significantly since 2022. Even if the interest rate on existing housing loans is significantly reduced, it will be difficult to reverse the trend of residents repaying housing loans in advance, and may exacerbate the pressure on the contraction of bank assets. As a result, such a policy could weaken banks' net interest margins and fail to produce the desired credit expansion effect. It is expected that the monetary authorities will conduct a comprehensive and prudent assessment of the need for such policies.