Core Viewpoints On May 7, 2025, the State Council Information Office held a press conference where the People's Bank of China Governor Pan Gongsheng proposed a package of monetary policy measures, mainly consisting of three categories of ten policies, which we summarize into five key tools: Tool 1: The central bank will lower the reserve requirement ratio by 50 basis points, aimed at promoting moderate credit expansion and alleviating funding disturbances caused by the concentrated supply of government bonds; Tool 2: The central bank will cut interest rates by 10 basis points and guide the LPR to decline, aimed at reducing financing costs for the real sector; Tool 3: Structural monetary policy interest rates will be lowered, and the scope of relending will be expanded; Tool 4: Optimize two monetary policy tools supporting the capital market, aimed at actively identifying high-quality listed companies based on the market's familiarity with listed companies and industry institutions, allowing them to decide whether to leverage and buy stocks, thereby promoting the long-term healthy development of the financial market through market-oriented means; Tool 5: Establish a risk-sharing tool for technology innovation bonds to assist traditional urban investment platforms in accelerating their transformation into operators of technology innovation industries. Regarding subsequent monetary policy, with increasing external environmental uncertainties, the central bank has shifted its primary goal from international balance of payments and financial stability to stabilizing growth and promoting a reasonable rebound in prices. By lowering reserve requirements and interest rates, it aims to hedge against external shocks and maintain liquidity to support domestic demand.

Throughout the year, it is expected that the monetary policy will maintain an accommodative tone, forming a policy synergy with fiscal and industrial policies. We anticipate another 50 basis point reserve requirement cut and a 20 basis point interest rate cut within the year. Content Summary Tool 1: The central bank will lower the reserve requirement ratio by 50 basis points, and we expect another 50 basis point cut within the year On May 7, Governor Pan announced at the press conference held by the State Council Information Office that the reserve requirement ratio would be lowered by 0.5 percentage points, providing approximately 1 trillion yuan in long-term liquidity to the market.

The reserve requirement cut aims to promote moderate credit expansion and alleviate funding disturbances caused by the concentrated supply of government bonds. On one hand, although the economy stabilized and recovered in the first quarter, the fundamental situation of insufficient effective demand in the real sector has not changed. We pointed out in previous commentary reports that "the financial data in March exceeded expectations, mainly supported by a significant increase in short-term loans for enterprises.

We believe that the strength of short-term loans compared to medium- and long-term loans still reflects the relatively weak demand in the real economy. During the monetary policy easing cycle, with lower bank loan rates and higher approval efficiency, enterprises are more inclined to maintain cash flow through short-term loans rather than bond financing for expansion, which is also confirmed by the significant year-on-year reduction in corporate bonds under the social financing metric." This indicates that there is still room for recovery in short-term economic vitality, and future financial data's contribution to the economy relies on improving policy transmission efficiency.

On the other hand, there is a large scale of maturing reverse repos in the second quarter, and it faces disturbances from the concentrated supply of government bonds, compounded by the large tax payment month (April), necessitating the central bank to lower the reserve requirement to hedge against liquidity gaps. In April, the scale of maturing reverse repos was substantial, with 1.2 trillion yuan in 3-month and 500 billion yuan in 6-month reverse repos maturing. Looking ahead, the peak supply of government bonds is approaching, with the issuance plans for ultra-long special government bonds and capital injection special government bonds already announced, and the first batch of special government bonds was issued on April 24, increasing the pressure of government bond supply Despite the central bank increasing the scale of MLF and using reverse repos to supplement liquidity in April, these tools have short durations and high costs, making it difficult to match the medium- and long-term funding needs of government bond issuance.

We believe that compared to interest rate cuts to reduce financing costs for enterprises, reserve requirement ratio (RRR) cuts aim to release liquidity at the aggregate level, promote moderate credit expansion, alleviate liquidity pressure caused by the concentrated supply of local government bonds, stabilize the economy and employment situation, and will provide certain positive support for subsequent financial data. Tool 2: Central bank cuts interest rates by 10 basis points and guides LPR to decline; we expect another 20 basis points cut within the year On May 7, the central bank announced that to implement a moderately loose monetary policy and strengthen support for the real economy, starting from May 8, 2025, the 7-day reverse repo operation rate in the open market would be adjusted from the previous 1.50% to 1.40%. The central bank lowered the 7-day reverse repo rate by 10 basis points, which simultaneously led to a decline of 10 basis points in the 1-year and 5-year LPR, fully reflecting the role of the 7-day reverse repo rate as a core policy rate.

The current upper and lower limits of the new interest rate corridor mechanism are set at the 7-day reverse repo rate plus 50 basis points and minus 20 basis points, thus adjusting the interest rate corridor to 1.2%-1.9%. The core purpose of the central bank's interest rate cut is to reduce financing costs for the real sector. One of the purposes of lowering the 7-day reverse repo rate is to guide the LPR downward, reduce financing costs for the real sector, and strengthen financial support for the economy.

Currently, China's real interest rates remain relatively high, and a decline in the LPR will lead to a decrease in real interest rates, which can improve investment and consumption sentiment, thereby reinforcing support for the real economy. Additionally, a decline in the 5-year LPR is beneficial for reducing the interest burden on mortgage borrowers, improving consumption, and can also somewhat boost residents' home-buying sentiment. Tool 3: Structural monetary policy interest rate cuts and expansion of relending quotas Regarding structural monetary policy tools, President Pan mentioned at the press conference that in terms of interest rates, "the interest rates of structural monetary policy tools will be reduced by 0.25 percentage points, including: the interest rates of various special structural tools and the relending rate for supporting agriculture and small enterprises, which will be lowered from the current 1.75% to 1.5%; the rate for pledged supplementary loans (PSL) will be reduced from the current 2.25% to 2%."

In terms of quotas, an additional 300 billion yuan will be added to the relending quota for technological innovation and technological transformation (increasing from the current 500 billion yuan to 800 billion yuan), and a 500 billion yuan "relending for service consumption and elderly care" will be established (to guide commercial banks to increase credit support for service consumption and elderly care), along with an increase of 300 billion yuan in the relending quota for supporting agriculture and small enterprises (to support banks in expanding loans to agricultural, small, and private enterprises). In terms of pricing, the structural tool interest rate before the cut (1.75%) had a 25 basis point inversion with the 7-day reverse repo rate (1.5%), which compressed the interest spread for banks to lend through relending. After the interest rate cut, the interest spread narrows to 10 basis points, which helps reduce banks' funding costs and enhances their willingness to lend to specific sectors In terms of quantity, firstly, the increase of 300 billion yuan in re-loans for technological innovation meets market expectations.

In March 2025, President Pan announced that the scale of re-loans for technological innovation and technological transformation would be expanded from the original 500 billion yuan to 800 billion to 1 trillion yuan. This move aims to meet the surging financing needs of technology-based enterprises and the equipment renewal sector. Secondly, the establishment of 500 billion yuan in re-loans for service consumption and elderly care focuses on increasing and optimizing consumption supply.

In terms of service consumption, in April, the Guangdong branch of the People's Bank of China established a special quota of 10 billion yuan for "Renewal Loans" to support agriculture and small businesses, focusing on supporting financial institutions' credit allocation to manufacturing enterprises and consumer service industry enterprises related to "trade-in" consumer goods, such as automotive, home appliances, furniture, communication equipment manufacturing enterprises, as well as wholesale and retail, accommodation, catering, culture, entertainment, and elderly care service industry enterprises. The core of this service consumption re-loan is expected to be significant. Regarding elderly care re-loans, it is expected to complement the existing inclusive elderly care re-loans, focusing on supporting the construction of elderly care service facilities, smart elderly care, and the integration of medical care and elderly care in line with national strategic directions.

Since 2022, the central bank has launched a pilot program for inclusive elderly care special re-loans in conjunction with the National Development and Reform Commission, with an initial quota of 40 billion yuan and an interest rate of 1.75%, which has been expanded nationwide by 2024, with a loan balance reaching 2.1 billion yuan by September 2024. Tool 4: Optimize Two Monetary Policy Tools Supporting the Capital Market The central bank proposed to "merge the 500 billion yuan swap convenience for securities, funds, and insurance companies with the 300 billion yuan re-loan for stock repurchase and increase, with a total quota of 800 billion yuan." The establishment of these two tools aims to rely on the most familiar listed companies and industry institutions to actively identify high-quality listed companies, allowing them to decide whether to leverage and buy stocks, thereby using market-oriented means to promote the long-term healthy development of the financial market.

For the swap convenience tool, its internal mechanism supports eligible industry institutions (securities, funds, insurance companies) to use stocks, stock ETFs, bonds, etc., as collateral to swap for high liquidity assets such as government bonds and central bank bills from the central bank for collateral financing. For stock repurchase increases, the main focus is to guide banks to issue relevant loans to listed companies and major shareholders that meet the review conditions through re-loans. Specifically, when the stock market is oversold and stock prices are undervalued, industry institutions and listed companies with professional market judgment will have a strong willingness to buy, thereby increasing the usage of the tool.

Conversely, when stock prices rise and liquidity recovers, the cost of repurchase increases, and the usage of the tool will naturally decrease. Through a market-oriented incentive mechanism, the two tools fully play the role of correcting capital market over-adjustments and stabilizing market expectations, linking monetary policy transmission with financial stability, while achieving credit creation and stabilizing the stock market. As of now, the swap convenience has conducted two operations with a total amount of 105 billion yuan; over 500 listed companies and major shareholders have announced the use of loans to repurchase and increase stocks, with a total loan amount of approximately 300 billion yuan, setting a historical high Tool 5: Establishing Risk Sharing Tools for Technology Innovation Bonds The central bank has established risk sharing tools for technology innovation bonds, with the core mechanism being the provision of low-cost relending funds by the central bank, which can be used to purchase technology innovation bonds.

It collaborates with local governments, market-oriented credit enhancement institutions, and others to share part of the default loss risk through diversified credit enhancement measures such as joint guarantees, providing support for technology innovation enterprises and equity investment institutions to issue low-cost, long-term technology innovation bonds for financing. We believe this tool breaks through the traditional single credit enhancement model of credit bonds, reducing the issuance threshold for technology innovation enterprises through a combination of shared risks between the central and local governments and market-oriented risk pricing. It aims to alleviate the financing difficulties faced by technology enterprises due to long R&D cycles and insufficient collateral.

From the perspective of urban investment transformation, according to policy requirements, urban investment companies need to reduce the proportion of urban construction-related businesses (below 30%) and cultivate new productive forces such as the digital economy and strategic emerging industries. Technology innovation bonds provide new financing channels for transforming urban investments, replacing the previously land-collateralized urban investment bonds, while aligning with national industrial policy guidance, assisting traditional urban investment platforms in accelerating their transformation into technology innovation industry operators. Switching of Monetary Policy's Primary Objective Towards Easing With increasing uncertainty in the external environment, the central bank has shifted its primary objective from balance of payments and financial stability to stabilizing growth and promoting a reasonable recovery in prices.

It aims to counter external shocks through reserve requirement ratio cuts and interest rate reductions, maintaining liquidity easing to support domestic demand. China's central bank adopts a multi-target monetary policy, and the choice of primary objectives will be dynamically weighed based on the economic environment. Previously, China's monetary policy prioritized balance of payments and financial stability, leading to a tighter policy to address capital outflow risks and domestic financial stability.

Currently, the central bank has shifted its focus to economic growth and promoting a reasonable recovery in prices, using easing tools such as reserve requirement ratio cuts and interest rate reductions to counter economic downward pressure and external environmental uncertainties. For the year, it is expected that the monetary policy will maintain an easing tone through 2025, forming a policy synergy with fiscal and industrial policies. We anticipate one more 50 basis point reserve requirement ratio cut and a 20 basis point interest rate reduction throughout the year.

Authors of this article: Li Chao, Fei Jin, Source: Zhejiang Merchants Securities Macro Research Team, Original Title: "Monetary Policy Re-easing Drives Dual Bulls in Stocks and Bonds" Risk Warning and Disclaimer The market has risks, and investment should be cautious. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial conditions, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances.

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