The People's Bank of China, the country's central bank, announced on Sunday that it would cut the reserve requirement ratio for commercial banks by 1 percentage point, effective from Oct 15.
The RRR cut will inject a net 750 billion yuan (108.8 billion U.S. dollars) in cash into the banking system by releasing a total of 1.2 trillion yuan (174.0 billion U.S. dollars) in liquidity, with 450 billion yuan (65.3 billion U.S. dollars) of that to offset maturing medium-term lending facility (MLF) loans.
Economists predicted further cuts ahead, and the next RRR cut would come early next year or before the Spring Festival.
Overall, the RRR cut will effectively offset investors' anxiety during the holiday, such as slumps in Hong Kong shares and reduced market panic, said Huang Hanbin, a popular commentator on economics.
However, after the RRR cut, there will be no new positive news in the short term, the market is expected experience a small rebound, then extend its current trend. Investors should not be overly optimistic, Huang added.
China's major stock indices ended lower Monday, with the benchmark Shanghai Composite Index down 3.72 percent to finish at 2,716.51 points. The Shenzhen Component Index lost 4.05 percent to end at 8,060.83 points.
The RRR cut will optimize liquidity structure, said Shen Juan, an analyst at Huatai Finance. The 450 billion yuan (65.3 billion U.S. dollars) used to pay back the medium-term lending facility will help banks reduce the cost of debt, while the incremental capital of 750 billion yuan (108.8 billion U.S. dollars) that will be injected into the market to support small, micro and private enterprises will help banks increase their assets income and reduce financing cost of real economy, as well as the credit risk pressure of bank portfolios.
Furthermore, the evaluation of financial sector shares, especially bank shares, which is at the bottom of evaluation, is expected to rally again, Shen added.
In the short term, the RRR cut will have a limited impact on the bond market, said Zhao Wei, an analyst at Changjiang Securities. During the week-long National Day holiday, U.S. Treasury yields recorded multi-year highs, with the 10-year and 30-year yields hitting seven-year and four-year highs, respectively.
The RRR cut could effectively relieve domestic market sentiment, Zhao said. Meanwhile, high pork prices and oil prices are expected to drive up the inflation expectations, which will further push down the bond market. In the medium and long term, China's bond market will still return to its fundamental, Zhao added.
Yields of China's 10-year central government bonds have been trending lower this year, standing at 3.64 percent at lunch break on Monday.
The PBOC said in a statement that it will "continue to take measures, if necessary", to stabilize market expectations, and the RRR cut will not put depreciation pressure on the renminbi.
This comment showed that on the one hand the central bank thinks domestic goals should be given priority, on the other hand, the PBOC has the will and capacity to maintain the exchange rate of yuan against the U.S. dollar at a specific level, said Zhang Ming, a researcher at the Chinese Academy of Social Sciences.
The central parity rate of the Chinese currency renminbi, or the yuan, weakened 165 basis points to 6.8957 against the U.S. dollar Monday, according to the China Foreign Exchange Trade System.
It is the lowest since May last year but still short of the psychological 6.9000 level that dealers had eyed. It is unlikely that the renminbi will continue to drop below the 7.0000 level by the end of the year, Zhang added.
Real Estate Market
The RRR cut will have an indirect impact on the real estate market, said Yan Yuejin, research director of the E-house China R&D Institute, a property research agency.
Recently, as the government continued to unveil new policies to control the market, property developers have showed little enthusiasm in taking new land. The amount of failed land auctions is increasing, and extending pessimistic sentiment to the market.
Sunday's move will help some big property developers to obtain commercial banks credit and improve their liquidity, which will have an active impact on the real estate market, Yan added.