The Deposit Rate Will Play A Bigger Role In The Future.

In the last week of 2015, the people's Bank of China announced the escalation of macro prudential regulation.

The deposit reserve ratio, a long-term monetary policy tool highly concerned by the market, is facing a change of role.

In restricting and motivating financial institutions' market behavior, the deposit rate will play a greater role in the future, and the function of putting money and stimulating growth will weaken.

In what aspects of the macro Prudential assessment system has been upgraded:

1., the "water discharge" mode changed: "flood irrigation" gradually changed to "targeted drip irrigation".

2., monetary policy objectives: the change from money supply to interest rate.

3. expand the scope of consideration for the assets of commercial banks.

Behind the changes are the following factors:

1. the correlation between money supply and real economy is gradually weakening.

2., the concept of regulation has changed from directly affecting the real economy to guiding the market behavior of financial institutions.

3. the current financial supervision system based on separate supervision is not able to cope with the impact of major financial emergencies.

4. in the initial stage of interest rate liberalization, commercial banks' pricing behavior should be included in the regulatory system to prevent interest rates rising.

MPA: the birth of macro Prudential evaluation system

In December 29th, the people's Bank of China announced on its website that the existing differential reserve dynamic adjustment and the consensual loan management mechanism "upgraded" as the "Macro Prudential Assessment" (MPA) since 2016.

The seven aspects of capital and leverage, asset liability, liquidity, pricing behavior, asset quality, external debt risk and credit policy implementation of financial institutions are included in the assessment area.

The central bank also said it would conduct quarterly assessments of financial institutions and monitor and guide them on a monthly basis.

This means that there will be more frequent directional adjustments in order to encourage or punish corresponding financial institutions.

In December 30th, Ma Jun, chief economist of the central bank's Research Bureau, also wrote in the financial times of the central bank to re-examine the role of deposit rate adjustment.

Ma Jun said that the correlation between money supply and the real economy is gradually weakening, and that the reduction of financing costs may not necessarily lead to a decrease in the cost of financing, and may also exacerbate short-term interest rate fluctuations.

China's monetary policy objective is changing from the quantitative pattern of money supply to the price based interest rate. The intensity and frequency of future adjustment of the deposit rate should be based on short-term interest rate stability and no longer be regarded as a policy tool that directly affects the real economy.

"I agree with Ma Jun that the future deposit rate will be more used for structural fine-tuning rather than the overall reduction expected." CITIC Securities Research Director, chief fixed income analyst, said in a telephone interview, "it is difficult for the market to reduce interest rates by letting up water."

Before that, the central bank encouraged the bank loans to invest through the consensual loan mechanism.

And the rhythm is in line with the central bank's macro policy intentions.

Under the new system, in addition to the narrow loan assets, the Central Bank of China also incorporated the "generalized credit" of bond investment, equity and other investments, and resale assets into the formula of capital adequacy ratio.

This means that commercial banks used to avoid capital constraint through "off balance sheet assets", or they will face the punishment of the difference of the central bank's raise the deposit rate.

"Generalized credit growth is an important improvement, which can better adapt to the trend of asset diversification in financial markets and reduce the Arbitrage Behavior of financial institutions," Mao Junhua, managing director of CICC research department wrote in his report last week.

He further pointed out that financial institutions with a broad credit growth rate would be buffered by counter cyclical capital buffers.

The adjustment of deposit rate is not the same as usual in the past. When the Central Bank of China announced the readiness rate of readiness in June 2014, it frequently used the "extra reduction of deposit rate 0.5%" with conditional conditions to encourage the financial institutions that meet the requirements of prudent operation and "three rural" or small and micro enterprise loans.

Wang Yifeng, deputy director of the financial development research center of Minsheng Bank Research Institute, predicted in the telephone interview that under the new MPA system, not only

Differential adjustment, deposit reserve interest rate in the future may also be adjusted differently, to financial institutions to implement refined incentives.

Weak economic growth and the pressure of capital outflow on the base currency have brought about a strong reduction in market expectations.

Peng Bo's median forecast for 18 economists in -22 December 17th last year showed that China was 2016 before the end of the year.

There is a 2.5% reduction.

Since the central bank's approval in October last year, the statutory reserve ratio has not yet been universally adjusted.

On Tuesday, the Central Bank of China conducted a 130 billion yuan 7 day reverse repurchase through open market operations to supplement market liquidity.

The first open market operation day of the new year has set the largest single day in nearly 4 months, with an interest rate of 2.25%.

A day earlier, China's Shanghai and Shenzhen 300 index dropped 7%, triggering the fusing mechanism to close early.

The overnight repo rate in the inter-bank market dropped to 2.01% at 14 p.m., the last trading day of December 31st last year, the overnight repo rate rose to 2.12%, the highest point since April 2015.

Ma Jun has repeatedly pointed out publicly that China's future monetary policy goal should be shifted from regulating the growth of M2 to the priority of stabilizing short-term interest rates in a "corridor of interest rates".

At present, both the Federal Reserve and the European Central Bank adopt the monetary policy framework based on target interest rate.