On September 24, Pan Gongsheng, President of the People's Bank of China, announced that the deposit reserve ratio would be cut by 0.5 percentage point in the near future. This is the second time that the People's Bank of China has lowered the deposit reserve ratio this year, and is expected to provide about 1 trillion yuan of long-term liquidity to the financial market. Pan Gongsheng stated that there is still room for a certain reduction in China's reserve requirement ratio, and there may be further reductions before the end of the year. Pan Gongsheng also announced that the interest rate for 7-day reverse repo operations will be further reduced to 1.5%. As the main policy interest rate of the People's Bank of China, this interest rate adjustment will drive the medium-term lending facility (MLF) interest rate down by about 0.3 percentage points, and the loan market quotation rate (LPR), deposit rate, etc. are expected to decline by 0.2 percentage points to 0.25 percentage points. This is the second time that the People's Bank of China announced to cut the policy interest rate after more than two months. In July, the operating interest rate of the 7-day reverse repo was reduced from 1.8% to 1.7%, and this time to 1.5%. Reserve requirement ratio cuts and interest rate cuts are Keynesian countercyclical monetary policy tools. This school of thought advocates flexibly adjusting monetary policy in conjunction with government goals during economic fluctuations, in order to expand aggregate demand and stabilize economic growth. This year's government work report has set China's economic growth target at 5%. Although China's GDP grew by 5% in the first half of the year, the growth rate in the second quarter was only 4.7%, which poses certain hidden concerns for achieving the annual growth target. At the same time, China's fixed assets investment and consumption performance is weak. The data shows that from January to August 2024, the national fixed assets investment (excluding farmers) will increase by 3.4% year on year. Among them, the private fixed assets investment will decline by 0.2%, while the total retail sales of social consumer goods will increase by 3.4% year on year. In August, it will decline to 2.1%, reflecting the lack of overall consumption vitality. Meanwhile, the weakness of the real estate market has also had a significant drag effect on the economy. From January to August, the national real estate development investment decreased by 10.2% year-on-year. The sales area and sales revenue of newly-built commercial housing decreased by 18.0% and 23.6% respectively year-on-year. The Purchasing Managers' Index (PMI) for the manufacturing industry in August was 49.1%, a decrease of 0.3 percentage points from the previous month. The outlook for the manufacturing industry has slightly declined and has remained below the boom bust line since May. It is undeniable that the problems of shrinking macroeconomic demand, supply shocks, and weakened expectations still exist in China. Therefore, it is necessary to increase macroeconomic regulation, strengthen countercyclical and cross cyclical policy adjustments, continue to implement active fiscal policies and prudent monetary policies, and strengthen policy tool innovation and coordination. In terms of fiscal policy, this year's government work report clearly stated that proactive fiscal policy should be moderately strengthened, quality and efficiency improved, the deficit ratio is planned to be 3%, and the deficit size is 4.06 trillion yuan. It is also planned to issue ultra long term special treasury bond for several consecutive years, which is specifically used for the implementation of national strategies and security capacity building in key areas. This year, we will first issue 1 trillion yuan of special treasury bond. Implement the policy of structural tax reduction and fee reduction, with a focus on supporting technological innovation and the development of manufacturing industry. In terms of monetary policy, the government work report clearly states that a prudent monetary policy should be flexible, moderate, precise, and effective. The People's Bank of China maintains reasonable and sufficient liquidity, and the scale of social financing and money supply match the expected goals of economic growth and price level, so as to promote the stable and moderate decline of social comprehensive financing costs. The monetary policy of the People's Bank of China to cut reserve ratio and interest rate this time is strong, which can effectively promote investment and consumption, expand total demand, and thus contribute to stable economic growth. In addition, reserve requirement ratio cuts and interest rate cuts have also played a role in stabilizing the capital market. On the day of the release of reserve requirement ratio cuts and interest rate cuts, the stock market experienced a strong rebound, with the Shanghai Composite Index recording its largest daily increase in four years, demonstrating the effective boost of liquidity expansion on market confidence. (Yuan Zheng, Senior Researcher at the Yangtze River Economic Belt Research Institute, Professor at the School of Economics, Southwest University of Finance and Economics) (New Press)