(Yicai) Dec. 4 -- Chinese financial institutions will be more inclined in future to cut the reserve requirement ratio, which is the amount of capital reserves that banks must hold onto, rather than lower interest rates which are already at a historical low, the former head of the People’s Bank of China’s statistics and analysis department said.

There is still room for the RRR to be lowered and trimming the RRR is an effective way, along with cutting interest rates, of boosting liquidity in the real economy, Sheng Songcheng said yesterday at the China Europe International Business School Finance and Investment Forum and CEIBS Lujiazui Finance 50 Forum.

The weighted RRR is currently at 7.4 percent, while the one-year and five-year benchmark loan prime rates are the lowest they have ever been at 3.45 percent and 4.2 percent, respectively.

RRR cuts will increase the amount of funds the banks can use at their discretion, said Sheng, who is also adjunct professor of Economics and Finance at CEIBS. Lenders are the biggest purchasers of central and local government bonds, which are an important fiscal policy tool, Around 64 percent of central government bonds and 86 percent of local government bonds are held by banks.

Whereas there is not much space left for banks to keep cutting interest rates, he said. The net interest rate spread was 1.73 percent as of Sept. 30, the lowest since statistics began in 2010. In the first three quarters, banks' net profit edged up 1.6 percent year on year, but it was still a dip of 1 percentage point from the end of 2022. In September, the weighted average rate for money lent to corporations was 3.8 percent, the lowest ever. On top of this, the interest rate gap between China and the US is the highest it has ever been.

The Chinese yuan has started to climb now that this round of US’ rate hikes has come to an end, and the interest rate gap between China and the US will stabilize, Sheng said. In the future, the rate gap and the direction of change will be key factors in determining the exchange rate. The redback is likely to continue to appreciate slightly.

China's key economic indicators in the fourth quarter will be better than expected as stabilizing policies continue to take effect and due to the low base line last year, he said. But more effort is needed if the government aims to achieve economic growth of around 5 percent next year.

Fiscal policy will stay expansionary next year, he added.

Editors: Xu Wei, Kim Taylor