(Yicai) Jan. 21 -- Discussions around the direction of monetary policy in China have intensified since the start of the year, but unlike mainstream opinions, the chief financial analyst for the country at US investment giant Morgan Stanley is against comprehensive cuts to the reserve requirement ratio or interest rates due to the disadvantages outweighing the benefits.

"Comprehensive rate cuts do more harm than good and should not be viewed as a magic solution for stimulating the economy," Xu Ran said in a recent interview with Yicai.

On Jan. 15, the People's Bank of China unveiled a policy package consisting of eight measures, focusing on structural monetary policy tools aimed at "increasing support while lowering costs," including reducing rates and increasing quotas to provide targeted support for key areas and weak links such as private small and micro enterprises and technological innovation.

On Jan. 19, the central bank cut the rates for relending and rediscounting by 0.25 percentage point, directing funds towards private small and micro enterprises and other key areas.

The implementation of this structural rate cut suggests that broad monetary policies are unlikely to arrive quickly, Xu said. "Financial products rely on layered interest rate risks, so reducing rates will not stimulate consumption and credit.

"Instead, reasonable risk pricing will lead to sustainable credit supply and a reasonable growth in demand," he noted. "Even if there is policy room, low-interest-rate policies should not be seen as a panacea for stimulating the economy.

"The traditional economic logic of stimulating consumption and credit through rate cuts does not apply to China," Xu said. "A further decline in the yield of the country's financial assets could lead to multiple adverse consequences."

For example, "banks may further reduce their risk appetite due to lower yields, resulting in decreased credit availability, while the financial system's ability to absorb and manage risks would weaken, which is also unfavorable for resolving existing risks," Xu pointed out.

"The practices of countries with zero interest rates have proven that excessively low rates can obstruct market competition and become a short-term solution akin to drinking poison to quench thirst," he stressed, adding that the current economic pain points are structural imbalances rather than insufficient demand.

Targeted support for key sectors is essential for achieving precise empowerment, while broad-based easing will only mask deeper issues, Xu pointed out.

As financial risks are resolved in an orderly manner and the credit structure continues to optimize, multiple favorable factors will provide strong momentum for the valuation rebound of financial stocks and the high-quality development of the industry this year, according to Xu. Among these, adjustments in the rate pricing mechanism and the stabilization and recovery of net interest margins will become the core driving forces, he said.

At the economic level, the growth of gross domestic product will likely remain stable or slightly improve this year, and the robust performance of the economic fundamentals will provide a favorable macro environment for the development of the financial industry, he added.

In addition, the net interest margin of banks will likely bottom out in the first half of this year and begin to gradually rebound in the second half, leading to a substantial revenue growth rebound in the banking industry, Xu said. Insurers are also expected to benefit from a reasonable recovery in market interest rates, which will improve their investment spreads and enhance profitability, he noted.

"A prolonged low net interest margin environment is not conducive to risk management and industry upgrades in the banking sector," Xu pointed out. "In 2026, the downward space for deposit rates is limited, and in the long term, there is a high probability of stable slight increases."

The key to economic recovery lies in improving distribution efficiency, Xu noted. By creating a suitable and stable interest rate environment, it can guide reasonable pricing, ensuring the protection of residents' property income and providing sustainable support for the stable development of the financial sector and industrial upgrades, promoting a positive economic cycle, he said.

Editor: Martin Kadiev