Inclusion of medium and short-term government bonds, differentiated reserve requirement ratio? The market is hotly discussing the possibility of central bank deposit reserve reform

Recently, the central bank's statements regarding the deposit reserve requirement system in its execution report have sparked heated discussions in the market.

On February 13, the central bank released the "2024 Fourth Quarter China Monetary Policy Execution Report," stating that "in the future, the People's Bank of China will continue to improve the deposit reserve requirement system based on changes in the economic and financial situation and the development of financial markets, and effectively utilize the policy adjustment function of the deposit reserve requirement tool."

As a result, the market is actively discussing the possibility of reforming the deposit reserve requirement system, with analyses predicting that future adjustments may guide the optimization of credit structure through differentiated reserve ratios.

In response, reporters interviewed several authoritative market experts and economists. Their combined viewpoints suggest that by flexibly adjusting the deposit reserve ratio, it is possible to better control the money supply and enhance the flexibility of monetary policy. The cancellation of the implicit lower limit of a 5% reserve ratio, including medium- and short-term government bonds in the deposit reserve requirement, and optimizing the assessment methods for targeted reserve requirement reductions are all feasible reform directions.

Huatai Securities expects that the deposit reserve requirement system will be further improved in 2025, with two capital market support tools becoming effective. In 2025, the central bank will continue to refine the deposit reserve requirement system based on changes in the economic and financial situation and the development of financial markets, effectively utilizing the policy adjustment function of the deposit reserve requirement tool.

The Central Bank May Innovate New Tools

For a long time, the central bank has nurtured the liquidity of the banking system by flexibly using the three traditional tools: deposit reserve requirements, relending, and open market operations, creating a suitable monetary and financial environment to support the stable and healthy development of the real economy.

From the perspective of deposit reserve requirement tools, from September 2003 to June 2011, the central bank raised the deposit reserve ratio 32 times, with the average deposit reserve ratio increasing from 6% to 20.1%. After 2013, the central bank subsequently lowered the deposit reserve ratio 29 times, with the average deposit reserve ratio decreasing from 20.1% to 6.6%. The central bank adjusts the statutory deposit reserve ratio based on changes in the economic situation, providing stable long-term liquidity funding for financial institutions.

According to the Financial Times, which is supervised by the central bank, experts stated:

With the continuous deepening of financial reform and the development of the payment and settlement system in our country, the assessment method for deposit reserves has shifted from a point-in-time method to an average method, thereby reducing the volatility of financial institutions' deposits at assessment points and smoothing out fluctuations in the money market.

In recent years, the central bank's toolbox for monetary policy has become increasingly rich. In addition to reserve requirement cuts and interest rate reductions, other tools also effectively reflect the intentions and results of macroeconomic regulation. For example, open market operations maintain a good liquidity environment through various liquidity management tools; structural relending tools effectively incentivize financial institutions to increase financial support for key areas; in the fourth quarter of 2024, the central bank also introduced two new tools to support the stable and healthy development of the capital market, reflecting the expansion and new exploration of the central bank's function in maintaining financial stability.

The Financial Times quoted expert opinions:

The new explorations and coordination between different tools also have systematic considerations, serving the improvement and perfection of the entire monetary policy adjustment framework. The overall decline in the statutory deposit reserve ratio has kept the liquidity of the banking system at a sufficient level, providing conditions for diminishing aggregate requirements and shifting more towards interest rate regulation

Currently, the central bank's policy interest rates have been clarified, the relationships between different varieties of interest rates have been further streamlined, the interest rate corridor is continuously improving, and the implementation of interest rate policies is also being standardized, making the transmission of interest rate policies smoother and more effective. This indicates that the monetary policy toolbox has been continuously evolving, and it is necessary to dynamically observe the central bank's monetary policy tools. In different situations, the central bank will have different tools to respond, and may even innovate and implement some new tools. Moreover, the use of tools during crisis response periods will differ from that during normal periods. Overall, the entire tool system will be improved to better meet the needs of macroeconomic regulation and the development of financial markets.

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