The People's Bank of China (PBOC) Makes Major Announcement on RRR Cuts and Interest Rate Cut, Releasing RMB 1 Trillion in Long-Term Liquidity; Interest Rate Cut Supports Steady Growth and Stabilizes Expectations

At a press conference held by the State Council Information Office today, leaders from the People's Bank of China (PBOC), the National Financial Regulatory Administration, and the China Securities Regulatory Commission gathered to introduce the "package of financial policies to stabilize the market and expectations." PBOC Governor Pan Gongsheng announced a package of 10 monetary policy measures at the meeting, including RRR cuts and interest rate cuts.

Caijing reporters learned that the RRR cut is divided into two parts. First, a 0.5 percentage point RRR cut will provide the market with long-term liquidity exceeding 1 trillion yuan. Second, the reserve requirement ratio (RRR) for auto finance companies and financial leasing companies will be reduced from the current 5% to 0%. Industry insiders pointed out to Caijing reporters that this RRR cut can adjust the market's liquidity structure, increase the supply of medium and long-term liquidity, and reduce banks' liability costs.

The adjustment of policy interest rates is divided into three aspects, including lowering the 7-day reverse repo operations rate in the open market from 1.5% to 1.4%, which is expected to drive the loan prime rate (LPR) to decline by approximately 0.1 percentage point in tandem. Industry insiders noted that this interest rate cut fully reflects a moderately accommodative monetary policy stance and is a powerful measure to support stable employment, enterprises, the market, and expectations. It is expected that the reduction in housing provident fund interest rates will directly alleviate borrowers' interest burdens, equivalent to increasing residents' incomes, enhancing their consumption capacity, and further unleashing the potential demand for rigid and improved housing.

RRR cuts enhance credit supply capacity in specific sectors

Caijing reporters learned that the RRR cut is divided into two parts. One part is a 0.5 percentage point RRR cut for large and medium-sized banks, which will provide the market with long-term liquidity exceeding 1 trillion yuan. The other part is to improve the reserve requirement system for auto finance companies and financial leasing companies by temporarily reducing their RRR from the current 5% to 0%.

"The current imbalance in market liquidity is mainly structural. To maintain abundant liquidity, the PBOC conducts daily operations for short-term liquidity injection, with a relatively large scale," a market participant analyzed to Caijing reporters. This RRR cut can adjust the market's liquidity structure, appropriately reduce the rolling over of short-term liquidity tools, increase the supply of medium and long-term liquidity, reduce banks' liability costs, enhance the stability of banks' liabilities, weaken banks' motivation to attract deposits with high interest rates, and compress the space for non-banking institutions' idle fund arbitrage.

This adjustment simultaneously improves the reserve requirement system for auto finance companies and financial leasing companies.

Industry experts pointed out that the PBOC has been reforming and improving the reserve requirement system in recent years.Auto finance companies and financial leasing companies are not deposit-taking financial institutions. They do not absorb deposits from the general public, and the reserve accounts they hold with the central bank cannot be used for clearing. Instead, the clearing function is actually undertaken by interbank deposit accounts opened with commercial banks. Their money creation mechanism is fundamentally different from that of banks. Implementing significant RRR cuts for these institutions is an important measure to improve the reserve requirement ratio (RRR) system.

"In addition, these two types of institutions directly provide financial support to the automotive consumption and equipment renewal investment sectors, and their reserve requirement ratios have long been lower than those of large and medium-sized banks. This round of significant and phased RRR cuts will help reduce the liability costs of these institutions, enhance the stability of their liabilities, and strengthen their ability to provide credit supply in specific sectors," the aforementioned expert further stated.

Timely interest rate cuts to support stable market expectations

Regarding the reduction of policy interest rates, Pan Gongsheng introduced that there are three main aspects. First, the interest rate for the 7-day reverse repo operations in the open market will be lowered by 0.1 percentage point, from 1.5% to 1.4%, which is expected to drive the LPR down by 0.1 percentage point accordingly. Second, the interest rates for structural monetary policy tools will be lowered by 0.25 percentage point. Third, the interest rates for individual housing provident fund loans will be lowered by 0.25 percentage point, with the interest rate for first-time homebuyers with loans exceeding five years being reduced from 2.85% to 2.6%.

Industry insiders pointed out that this round of interest rate cuts reflects the active implementation of the requirements set forth by the Political Bureau of the CPC Central Committee. The central bank's announcement of interest rate cuts fully embodies its moderately accommodative monetary policy stance and serves as a powerful measure to support stable employment, enterprises, markets, and expectations.

Pan Gongsheng also stated at the press conference that the Political Bureau of the CPC Central Committee meeting on April 25 called for "accelerating the implementation of more proactive and effective macro policies, making full use of more proactive fiscal policies and moderately accommodative monetary policies," and "implementing timely RRR cuts and interest rate cuts to maintain ample liquidity and strengthen support for the real economy."

Market analysts told Caixin reporters that this round of interest rate cuts not only involves a reduction in policy interest rates but also a decrease in the re-lending rates for supporting agriculture and small businesses, as well as housing provident fund loan interest rates. It is expected that the decline in policy interest rates will guide the Loan Prime Rate (LPR) and deposit interest rates to decline in tandem, which is conducive to maintaining the stability of commercial banks' net interest margins. Meanwhile, through interest rate transmission, it will effectively reduce the comprehensive financing costs of the real economy, consolidate the economic fundamentals.

Industry experts believe that the reduction in housing provident fund interest rates can effectively lower the threshold for residents to purchase homes, fully demonstrate the preferential nature of housing provident fund loans, stimulate residents' enthusiasm for housing consumption, better meet housing consumption demands, further unleash the potential of rigid and improvement-oriented housing demands, and support the sustained and healthy development of the real estate market.

According to a reporter from Cailian Press, the adjustment of the interest rate for housing provident fund loans covers both newly issued loans and existing housing provident fund loans. After the interest rate cut, newly issued housing provident fund loans will be subject to the new interest rate, while the interest rates for previously issued housing provident fund loans will be reduced starting from January 1, 2026.

It is reported that these measures can directly alleviate the interest burden on borrowers, which is equivalent to increasing residents' income and enhancing their consumption capacity. Taking a first-time personal housing provident fund loan with a principal amount of 1 million yuan, a 30-year term, and equal principal and interest repayments as an example, the monthly payment will decrease from 4,136 yuan to 4,003 yuan, a reduction of approximately 133 yuan, and the total interest expense will decrease by approximately 47,600 yuan.