After this reduction, the weighted average reserve requirement ratio of financial institutions is about 7.0%. This reserve requirement reduction will provide the market with long-term liquidity of approximately 1 trillion yuan. Lowering reserve requirements belongs to the category of monetary policy in macroeconomic regulation. Reserve funds refer to the cash in the inventory of commercial banks and the deposits deposited proportionally with the central bank, with the aim of ensuring that commercial banks have sufficient solvency in the event of large withdrawals from customers. The statutory reserve ratio refers to the proportion of reserves that deposit financial institutions (commercial banks) must deposit with the central bank in the deposits they absorb, as stipulated by the central bank. Lowering reserve requirements can adjust short-term liquidity. As one of the means by which the central bank regulates the money supply, the statutory reserve ratio can help the central bank control credit scale, constrain commercial bank credit lending, and thus regulate short-term liquidity. The deposit creation of banks is inversely proportional to the required reserve ratio. When the central bank lowers the required reserve ratio, the amount of money lent by commercial banks will expand the money supply exponentially through the currency multiplier effect. The recently held Central Economic Work Conference pointed out that further promoting economic recovery requires overcoming some difficulties and challenges, mainly insufficient effective demand, overcapacity in some industries, weak social expectations, and still many risks and hidden dangers. There are bottlenecks in the domestic circulation, and the complexity, severity, and uncertainty of the external environment are increasing. According to data released by the National Bureau of Statistics, in 2023, China's GDP increased by 5.2% year-on-year at constant prices, fixed asset investment (excluding farmers) increased by 3.0%, real estate development investment decreased by 9.6% year-on-year, and exports (in US dollars) decreased by 4.6% year-on-year. In December, the Purchasing Managers Index (PMI) for the manufacturing industry was 49.0, consistently below the boom bust line level. Overall, the Chinese economy is recovering well, but still faces issues of insufficient demand and weakened expectations. The Central Economic Work Conference pointed out that we must adhere to the principles of seeking progress while maintaining stability, promoting stability through progress, establishing first and then breaking through, continuously consolidating the foundation of stability and improvement, and continuing to implement active fiscal and prudent monetary policies. Active fiscal policies should be moderately strengthened, improved in quality and efficiency. A prudent monetary policy should be flexible, moderate, precise, and effective. Maintain reasonable and sufficient liquidity, and ensure that the scale of social financing and money supply match the expected goals of economic growth and price levels. Give full play to the dual functions of the total quantity and structure of monetary policy tools, activate stock, improve efficiency, and guide financial institutions to increase their support for technological innovation, green transformation, inclusive small and micro enterprises, and digital economy. Lowering reserve requirements is beneficial for stabilizing investment. This reserve requirement reduction will provide the market with long-term liquidity of approximately 1 trillion yuan. The increased money supply can supplement liquidity and better meet the funding needs of market investment. In theory, increasing the money supply can lower interest rates, lower the cost of funds, and stimulate investment. Lowering reserve requirements will boost the capital market
Edit：Luo yu Responsible editor：Jia jia
Source：china.com
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