Central Bank's 1 Trillion Liquidity Injection: Impact on Stock and Property Markets
On January 24th, the first comprehensive reserve requirement ratio (RRR) cut of 2024 was welcomed, with an expected release of 1 trillion in liquidity, which clearly exceeded previous market expectations. The secondary market also seemed to have a premonition, with the large financial sector rarely triggering a wave of stock price limits. Market views suggest that the trillion in liquidity is undoubtedly a "timely rain" for the real economy.
The long-awaited reserve requirement ratio cut has finally arrived.
On January 24th, People's Bank of China Governor Pan Gongsheng stated that the central bank will lower the reserve requirement ratio by 0.5 percentage points on February 5th, providing the market with long-term liquidity of about 1 trillion yuan; tomorrow, the interest rates for re-lending to agriculture and small businesses, as well as rediscounting rates, will be reduced by 0.25 percentage points, and efforts will continue to stabilize and gradually reduce the comprehensive financing costs in society.
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Each time the central bank cuts the reserve requirement ratio, it releases a large amount of liquidity, which will have varying degrees of impact on the stock market, real estate market, and exchange rates.
However, according to the historical performance of the Shanghai Composite Index (SSE), there is no inevitable connection between the RRR cut and the rise and fall of the stock market. For the stock market, referring to the performance of A-shares after previous RRR cuts, the RRR cut does not necessarily lead to a rapid rebound in A-shares.
Looking at data from the past two years, after the central bank announced RRR cuts in April and November 2022, and March and September 2023, the performance of the SSE on the following day was not good, with declines of 0.75%, 0.49%, 0.48%, and 0.28%, respectively.
The RRR cut releases 1 trillion in liquidity
On January 24th, the first RRR cut of the year was welcomed. After the market closed, People's Bank of China Governor Pan Gongsheng announced at a press conference held by the State Council Information Office that the reserve requirement ratio will be reduced by 0.5 percentage points on February 5th (the reduction does not include financial institutions that have already implemented a 5% reserve requirement ratio), providing the market with liquidity funds of 1 trillion yuan.
After this adjustment, the weighted average reserve requirement ratio for financial institutions will be approximately 7.0%.
At the same time, the central bank also stated that starting from January 25th, the interest rates for re-lending to agriculture and small businesses, as well as rediscounting rates, will be reduced by 0.25 percentage points, from 2% to 1.75%.The recent reserve requirement ratio (RRR) cut exceeded market expectations, as the general consensus had been that the central bank would likely focus on an accommodative monetary policy this year. For instance, at the end of last year, Wang Jun, Chief Economist at Huatai Asset Management Co., Ltd., forecasted that in 2024, the People's Bank of China would lower the RRR twice by a total of approximately 0.5 percentage points to strengthen the signal of a more relaxed policy operation.
Looking at past RRR cuts by the central bank, the norm has been a reduction of 0.25 percentage points. Consequently, Zhou Maohua, a macro researcher in the financial market department of China Everbright Bank, pointed out that while the market had anticipated this RRR cut by the central bank, the magnitude slightly exceeded expectations.
The release of trillions in liquidity will have several impacts. Industry insiders have analyzed that the liquidity support brought by the RRR cut is undoubtedly a "timely rain" for the market, providing "real money" to support financial institutions in increasing their support for the real economy. Additionally, it may also have a positive and upward impact on the continuously sluggish stock market.
As the waters warm in spring, the market knows first. On the 24th, the large financial sector welcomed a long-awaited surge, with nearly 20 financial stocks such as Everbright Securities, Guosheng Financial Holdings, Capital Securities, Huaxin Shares, Hongye Futures, Minmetals Capital, Nanhua Futures, and Jianyuan Trust hitting the upper limit of the daily price fluctuation.
What impact will it have on the stock and real estate markets? It can be seen that the financial sector, centered around banks, benefits significantly.
Specifically, the RRR cut can reduce banks' liability costs through two pathways. First, it can replace the costly Medium-Term Lending Facility (MLF) with cost-free reserve funds. Second, it can release more funds into the market, reducing the funding costs and net interest margin pressure for institutions. Industry insiders have stated that this could reduce the capital costs for financial institutions by 15 billion yuan.
This RRR cut can lower the funding costs for financial institutions, which will benefit real enterprises and alleviate the issue of expensive financing for these companies.
Beyond financial institutions, the market generally believes that the RRR cut will have a significant stimulating effect on the real estate sector. For example, banks will increase the intensity of mortgage lending, which can meet the financing needs of real estate companies. This was also reflected in the stock market on the 24th. As of today's closing, China Oceanwide Holdings Ltd. in the Hong Kong stock market rose by 18.433%, while Evergrande Real Estate and Agile Property both saw increases of over 5%.However, the current real estate industry is in a state of panic, with endless incidents of real estate companies' capital chains breaking and debt defaults. Therefore, the exact impact of the reserve requirement ratio reduction on the real estate industry is yet to be seen.
In fact, the original intention of the central bank's previous reserve requirement ratio reductions was to mitigate the impact of rising commodity prices on small and micro enterprises.
According to data from Business Society, in the 2023 commodity price fluctuation list, there were a total of 95 products that increased month-on-month, mainly concentrated in the chemical sector (48 kinds) and the textile sector (15 kinds). Products with an increase of more than 5% were mainly concentrated in the chemical sector. The top three products with the largest price increases were Codonopsis (91.08%), Angelica sinensis (90.07%), and Ophiopogon japonicus (77.47%).
Previously, relevant departments have also emphasized many times the need to ensure the supply and stabilize the prices of bulk commodities, to curb unreasonable price increases, and to prevent the transmission to consumer prices. At the same time, the country has also proposed multiple measures to help small and micro enterprises and individual businesses cope with the impact of rising raw material prices upstream, and to crack down on hoarding and price gouging.
Historical reserve requirement ratio reductions
Although the central bank's reserve requirement ratio reduction is conducive to further releasing liquidity and will have varying degrees of impact on the stock market, real estate, and exchange rates, for the capital market, there is no inevitable connection between the reserve requirement ratio reduction and stock market fluctuations.
Looking at historical data, since 2008, the central bank has reduced the reserve requirement ratio a total of 31 times. According to the performance of the Shanghai Composite Index, after the central bank announced the reserve requirement ratio reduction policy 31 times, the number of times the Shanghai Composite Index rose and fell the next day were 15 and 16 times, respectively. Within 5 days of announcing the reserve requirement ratio reduction, the number of times the Shanghai Composite Index rose was slightly higher than the next day, reaching 17 times.
Looking at the magnitude of the reserve requirement ratio reduction, the larger the reduction in the reserve requirement ratio, the greater the impact on the stock market. Among them, the largest increase was in November 2011 when the central bank announced a 0.5% reduction in the reserve requirement ratio, and the Shanghai Composite Index rose by 2.29% the next day.
In addition, in September 2008, the central bank announced a 1% reduction. Although the drop the next day reached 4.47%, the Shanghai Composite Index rose by 7.54% within 5 days.
Looking at the data from the past three years, the market seems to be in a state of "immunity" to the reserve requirement ratio reduction.Since the central bank announced targeted reserve requirement cuts in April 2020, various domestic and international factors have led the "central mother" to announce two comprehensive reserve requirement cuts each year in 2021, 2022, and 2023.
Among them, the reserve requirement cut in 2021 was the most effective in boosting the stock market. In July 2021, after the central bank announced a 0.5% reserve requirement cut, the Shanghai Composite Index (SCI) rose by 0.67% the next day. In December 2021, after the announcement of the reserve requirement cut, the SCI rose by 0.16% the next day.
However, after the central bank announced reserve requirement cuts in April and November 2022, and in March and September 2023, the performance of the SCI the next day was not good, with declines of 0.75%, 0.49%, 0.48%, and 0.28%, respectively.
In general, for the stock market, referring to the performance of A-shares after previous reserve requirement cuts, reserve requirement cuts do not necessarily lead to a rapid rebound in A-shares. However, due to the current friendly policy environment, securities firms are generally optimistic about future investment opportunities in the stock market.
GF Fund said that the overall reserve requirement cut is beneficial to the market, and it is expected that the financial real estate sector and the large-cap value style, which are most affected by policy suppression in the short term, are expected to be repaired. Since the direction of structural credit expansion is still in high-end manufacturing, green energy, and small and micro enterprises, from a longer time perspective, the reserve requirement cut may be more beneficial to the small and medium-sized growth style dominated by technology manufacturing.
Regarding this reserve requirement cut, Shenwan Hongyuan also said that the central bank's monetary policy is increasing policy intensity in the way deployed by the Central Economic Work Conference, and better stabilizing domestic demand by reducing the actual interest rate level. If subsequent credit expansion measures, especially fiscal policy, can have greater operational strength, the economic expectation may usher in a window for repair.