Economic Observer reporter Lao Yingying

On January 10th, Sheng Songcheng, Dean of the Research Institute of the China Chief Economist Forum and Professor at the China Europe International Business School, put forward three views at the 2026 China Chief Economist Forum Annual Meeting: the possibility of China's monetary policy taking small steps is relatively high; Lowering reserve requirement ratio is better than cutting interest rates; There is still some room for reserve requirement ratio cuts and interest rate cuts.

Sheng Songcheng stated that monetary policy usually focuses on short - and medium-term goals, and when faced with a lot of uncertainty, it is often necessary to "feel the stones and cross the river". Unlike fiscal policy, which can directly intervene in economic activities, monetary policy works indirectly and its effectiveness depends on the cooperation of commercial banks and the entire financial system. Its implementation effect is largely influenced by market feedback, and the transmission mechanism is more complex and the transmission path is generally longer. For example, in recent years, China has gradually formed a monetary policy transmission mechanism of "policy interest rate (OMO rate) - loan market quoted rate (LPR) - actual loan interest rate", which makes it difficult for the central bank to accurately control the changes in each link.

Sheng Songcheng also said that, however, China's monetary policy toolbox is increasingly rich, and the central bank is constantly enhancing the role of policy interest rates, and investing liquidity through various liquidity support tools, secondary market treasury bond trading and other ways to adjust the cost of capital and effectively stabilize interest rate fluctuations. From the perspective of the central bank's liquidity injection tools in recent years, they cover various types including short-term, medium-term, and long-term. The reserve requirement ratio is an important long-term liquidity injection tool. In addition, two important policy tools were introduced in 2024, and the policy toolbox continued to expand, providing solid support for coordinating fiscal policies and maintaining reasonable and sufficient liquidity.

In Sheng Songcheng's view, reducing reserve requirement ratio is better than cutting interest rates. Most of China's treasury bond and local government bonds are purchased by commercial banks. The reduction of RRR will increase the funds that commercial banks can freely use, so as to better support active fiscal policies. In the past few years, there has been a synchronous trend between the net liquidity injection scale of the central bank and the net financing scale of government bonds.

The reason why it is emphasized that reserve requirement ratio cuts are better than interest rate cuts, according to Sheng Songcheng, is that China's financial system mainly relies on indirect financing, and the financial sector needs to strike a balance between supporting the real economy and maintaining its own health. Since 2016, China's statutory reserve requirement ratio has been lowered 23 times, and the reserve requirement ratio for large deposit taking financial institutions has decreased from 17.5% to 9%, a cumulative decrease of 8.5 percentage points. However, policy interest rates (such as the 7-day OMO rate) have only been adjusted 14 times.

Sheng Songcheng stated that China's monetary policy mainly focuses on reserve requirement ratio cuts rather than significant interest rate cuts, and another reason is that the net interest margin of commercial banks in China is currently at a historical low. As of the end of the third quarter of 2025, the net interest margin of commercial banks is only 1.42%, a significant decrease from over 3.5% in 2008. In this situation, if the central bank significantly reduces interest rates, it will further intensify the operational pressure on commercial banks. In addition, the interest rate elasticity of consumption and investment in China is relatively low, and the effect of interest rate cuts on stimulating consumption and investment is limited. Enterprises consider investment risks and profits more when making investment decisions, and small changes in loan interest rates have little impact on them.

Sheng Songcheng also stated that the weighted average reserve requirement ratio of financial institutions in China is currently about 6.2%. Compared with major international economies, there is still significant room for China to lower reserve requirement ratios. Of course, the current price level in China is relatively low, and the RMB exchange rate is also maintaining an upward trend. The Federal Reserve is in a cycle of interest rate cuts, which also provides space for further interest rate cuts in China.