On the evening of January 3, the website of the People's Bank of China reported that the regular meeting of the Monetary Policy Committee of the People's Bank of China in the fourth quarter of 2024 was held recently. The meeting suggested that in the next stage, the intensity of monetary policy regulation and control should be increased, the forward-looking, targeted and effective monetary policy regulation and control should be improved, and the RRR and interest rates should be cut at the right time according to the domestic and foreign economic and financial situation and the operation of the financial market.

Experts expect that in 2025, the RRR may be cut by 0.5-0.75 percentage points, the policy rate will be lowered by 50 basis points, and the LPR will be guided to fall by 25 basis points. In addition, the meeting mentioned "promoting a steady and moderate decline in corporate financing and household credit costs", which may mean that the LPR and the policy rate may fall asymmetrically.

The LPR and the policy rate may fall asymmetrically

At the regular monetary policy meeting, the regulator once again emphasized the issue of exchange rate stability, and made it clear that it will be committed to stabilizing market expectations, resolutely preventing the formation of unilateral consensus expectations and self-realization, and preventing the risk of exchange rate overshoot.

This statement sends a clear signal that the regulator will not allow excessive fluctuations in the RMB exchange rate. In the face of the recent depreciation of the RMB exchange rate to a certain extent, experts pointed out that this is mainly due to external factors such as the strengthening of the US dollar. In 2025, the flexibility of the RMB exchange rate is expected to increase, but the regulator will use various tools to stabilize the exchange rate market in a timely manner to ensure the smooth operation of the exchange rate market.

The meeting also studied the idea of monetary policy for the next stage, and proposed to intensify regulation and control and improve the forward-looking, targeted, and effective policy. According to the economic and financial situation at home and abroad and the operation of the financial market, the meeting recommended that the RRR and interest rate reduction measures should be implemented at the right time. It is worth noting that the adjustment between the loan prime rate (LPR) and the policy rate may show an asymmetric downward trend in the future to better meet the needs of economic development.

|In 2025, how strong will the RRR and interest rate cuts be?

According to expert analysis, monetary policy in 2025 is expected to adopt a series of precise measures to ensure sufficient liquidity in aggregate and moderately reduce financing costs in terms of prices. Specifically:

RRR cut expectations: It is expected that the RRR will be cut by 0.5 to 0.75 percentage points this year to increase the supply of funds in the banking system and support financial institutions to better serve the real economy.

Policy Rate Cut: The plan is to lower the policy rate by 50 basis points to guide market interest rates downward by lowering the benchmark interest rate and reduce the borrowing burden on enterprises and residents.

LPR Adjustment: The Loan Prime Rate (LPR) is expected to fall by 25 basis points, which will help to modestly reduce corporate financing and personal credit costs without significantly impacting banks' net interest margins.

These measures are aimed at enhancing the effectiveness of monetary policy and stabilizing economic growth while avoiding the negative effects of excessive easing. The meeting stressed the importance of strengthening the guiding role of the central bank's policy interest rate and improving the formation and transmission mechanism of market-oriented interest rates.

Specific measures include:

Give full play to the role of the self-discipline mechanism of market interest rate pricing: ensure that all kinds of financial institutions can set prices reasonably and promote the healthy operation of the financial market.

Strengthen the implementation of interest rate policy: ensure that the policy intent is effectively transmitted to financial market participants at all levels, and promote the steady and moderate reduction of corporate financing and household credit costs.

Enrich and improve the monetary policy toolbox: not only limited to the traditional means of reducing reserve requirements and interest rates, but also through the purchase and sale of treasury bonds, we will pay attention to changes in long-term yields, optimize the structure of capital allocation, improve the efficiency of capital use, and prevent the phenomenon of capital idling.

It is worth noting that the statement of "promoting the steady and moderate decline of corporate financing and household credit costs" put forward by the meeting indicates that future policies will pay more attention to balance and stability. Considering that the net interest margin of commercial banks has fallen to a record low of 1.53% in the third quarter of 2024, experts believe that the market's expectations for a "large interest rate cut" may not be accurate. Therefore, the LPR and the policy rate may show an asymmetric downward trend, that is, the policy rate will be lowered more than the LPR to maintain the healthy development of the banking industry.

|Again to stabilize market expectations, the regulator may not allow the exchange rate to fluctuate too much

At the regular monetary policy meeting, the regulator once again emphasized the importance of enhancing the resilience of the foreign exchange market and stabilizing market expectations. The meeting pointed out that market management will be strengthened, resolutely deal with behaviors that disrupt market order, prevent the formation of unilateral consensus expectations and self-realization, guard against the risk of exchange rate overshoot, and ensure the basic stability of the RMB exchange rate at a reasonable and balanced level.

Zhao Qingming, vice president of the Institute of Exchange Management Information, said that the central bank's expectation of stabilizing the market again is intended to convey to the market that it will not allow excessive fluctuations in the exchange rate. In fact, in a horizontal comparison, despite the recent depreciation of the renminbi, its performance is still relatively stable compared to major currencies such as the Japanese yen, the British pound, the euro and the South Korean won. The depreciation of the renminbi is mainly due to external factors such as the strengthening of the US dollar.

Particular emphasis was placed on resolutely preventing the risk of unilateral consensus expectations and self-realization. The danger of forming a consensus depreciation expectation is that it may lead to a self-fulfilling prediction of the depreciation of the renminbi in the short term, which in turn will lead to large fluctuations in the exchange rate, which is extremely detrimental to financial stability. When market participants generally expect a currency to depreciate, they may accelerate the sale of that currency, causing the actual depreciation to exceed the level supported by economic fundamentals, creating a vicious circle.

Overall, the flexibility of the RMB exchange rate is expected to increase further in 2025, and regulators will show greater tolerance for moderate depreciation. However, if there is a sharp rise or fall in the RMB exchange rate that deviates from the fundamentals in the future, the regulator will use various tools to stabilize the foreign exchange market in a timely manner, such as adjusting the reserve requirement ratio and buying and selling treasury bonds, so as to guide market expectations and maintain the smooth operation of the exchange rate market. Historical experience shows that these policy tools have successfully played a role in stabilizing the market and effectively preventing the risk of exchange rate overshoot in the past.

Regulators have a range of effective policy tools to deal with exchange rate fluctuations, including but not limited to:

RRR and interest rate cuts: By reducing the reserve requirement ratio and interest rate, market liquidity will be increased and financing costs will be reduced.

Open market operations: Through the purchase and sale of financial instruments such as treasury bonds, the supply of funds in the market is regulated and short-term interest rates are affected.

Foreign exchange reserve intervention: If necessary, foreign exchange reserves are used to directly intervene in the market to stabilize the exchange rate.

Management of cross-border capital flows: Measures are taken to control capital outflows and maintain a balance between supply and demand in the domestic foreign exchange market.

Make good use of the newly established tools to maintain the stability of the capital market

Securities, funds, insurance company swap facilities and share buybacks to increase holdings and refinance

At the regular monetary policy meeting, the regulator once again emphasized the importance of making good use of newly established tools such as securities, funds, insurance company swap facilities, and stock repurchase and refinancing to maintain the stability of the capital market. These tools are designed to help market participants cope with short-term liquidity pressures and enhance market resilience and confidence by providing additional financial support and flexibility.

The evolution of the refinancing policy for stock buybacks

On September 24, 2024, Pan Gongsheng, Governor of the People's Bank of China, announced the creation of a refinancing for stock repurchase and increase holdings, as an important financial innovation measure, and the tool was officially issued on October 18 The Notice on Matters Concerning the Establishment of Stock Repurchase and Refinancing for Holding Increases was jointly issued by the People's Bank of China and relevant departments. This policy directs financial institutions to provide loans to listed companies and their shareholders specifically for the purpose of buying back and increasing their holdings of the company's shares, with the aim of stabilizing stock prices and boosting market confidence.

Policy adjustments and optimizations have lowered thresholds and extended deadlines

The financial management department has further adjusted and optimized the landing policy of stock repurchase and refinancing:

Lower the threshold for participation: Let more eligible enterprises receive financial support and expand policy coverage.

Extend the loan tenure: Give companies more time to implement buyback and increase their holdings plans to reduce short-term repayment pressure.

According to statistics, in 2024, the upper limit of the repurchase and shareholding increase plan disclosed by the whole market will exceed 250 billion yuan, showing the enthusiasm of enterprises and investors to use this tool to stabilize stock prices.

In addition, in order to better support the capital market, the central bank launched the second swap facilitation operation on January 2, 2025. Compared with the first operation, this operation is not only larger, but also has a significantly lower rate, which helps to reduce the cost of funds for financial institutions, increase their enthusiasm to participate in swap transactions, and thus inject more liquidity into the market.