Recently, the adjustment of the deposit reserve system has garnered attention within the financial industry, with experts delving into its implications for the banking sector and the broader economyAs reported, the People’s Bank of China (PBoC) plans to refine the deposit reserve system further based on changes in the economic and financial landscape and developments in the financial markets.

Presently, the weighted average reserve ratio stands at a low 6.6%, nearing the statutory reserve floor of 5%. This situation suggests that there is limited room for further decreases in the reserve ratio, indicating an urgent need for reform in the deposit reserve system.

In interviews conducted with financial analysts, it became clear that any changes to the deposit reserve requirements would significantly affect banks' liquidityLi Xifeng, a senior researcher, noted that when banks are mandated to increase their reserve ratios, the amount of funds available for loans diminishesConsequently, banks may find it necessary to raise deposit interest rates to attract savers, thereby enhancing their deposit appeal.

But why is there a push for such reforms? The deposit reserve ratio defines how much of their deposits banks must hold in reserve, dictated by regulations set forth by the central bankThis mechanism is crucial to ensure that banks can meet withdrawal demands from depositors and uphold the stability of the financial systemSince its inception in 1984, the deposit reserve system has undergone a dynamic evolution, highlighting the need for reforms that align more closely with contemporary economic realities.

The banking sector is increasingly eager to discern the next steps from the PBoC regarding adjustments to the deposit reserve systemAs indicated by Li Xifeng, the current average weighted reserve ratio has substantially declined from a previous peak of 20.1% to its present level of 6.6%, bringing it distressingly close to the mandated minimum of 5%. This leaves limited scope for further reductions, leading many to advocate reforms that can provide the PBoC with greater operational flexibility to respond to shifting economic conditions.

Prominent experts assert that reforms are imperative at this juncture

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Tian Xuan, the head of the National Institute of Financial Research at Tsinghua University, proposed defining a rational statutory reserve ratio that reflects the evolving economic landscapeHe advocates for a mechanism that enables dynamic adjustments to the ratio, suggesting potential reductions to as low as 3% to enhance market liquidity.

Shang Ke, a supervisor in the banking industry and integrated operations at the Bank of China Research Institute, concurred, expressing that the reform of the deposit reserve system is an essential response to changing economic and financial conditionsThere is a pressing need to bolster bank credit assistance, particularly as the average weighted reserve ratio has dropped below 7%. This indicates that while conventional tools like the deposit reserve ratio continue to play a vital role in macroeconomic governance, their efficacy and mechanisms necessitate a rethinking to support key economic areas and sectors that require financial backing.

Further analysis by Ren Tao, a senior researcher at the Shanghai Financial Development Laboratory, pointed out that traditional approaches to deposit reserves have historically prioritized structural dimensionsThis has, to an extent, made them a form of structural monetary policy tool, with divergent regulatory requirements for different financial institutionsHowever, such approaches often hinder the central bank's ability to meet its monetary policy objectives effectivelyGoing forward, expected reforms may simplify and clarify the relationship between reserve requirements and the total money supply.

The bank’s funding strategy will also be affected by reforms to the deposit reserve ratioFor instance, as Li Xifeng elucidated, reducing the reserve ratio can enhance the amount of loanable funds available to financial institutions, effectively alleviating financing difficulties and costs for enterprisesThis facilitation of business investment is vital for driving economic growth and pushing towards transformative changes within the economy, particularly as resources align with sectors deemed crucial by national policy.

However, it is important to realize that adjustments to the reserve ratio have a direct and immediate effect on the liquidity of bank funds, subsequently influencing deposit interest rates

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