The People's Bank of China (PBOC) issued an announcement on May 7, announcing that it would lower the deposit reserve ratio of financial institutions by 0.5 percentage points (excluding financial institutions that have implemented a 5% deposit reserve ratio) starting from Thursday (15th), and lower the deposit reserve ratio of auto finance companies and financial leasing companies by 5 percentage points.

According to Securities Daily, the central bank lowered the reserve requirement ratio by 0.5 percentage points, providing long-term liquidity of approximately RMB 1 trillion to the financial market.

According to the introduction by Pan Gongsheng, governor of the People's Bank of China, at a press conference held by the State Council Information Office on May 7, lowering the reserve requirement ratio can strengthen the structure of the central bank's provision of liquidity to the banking system, reduce banks' liability costs, and enhance the stability of bank liabilities.

At the same time, the central bank will phase out the deposit reserve ratio for auto finance companies and financial leasing companies from the current 5% to 0%. These two types of institutions directly provide financial support to areas such as automobile consumption and equipment renewal investment. After lowering the reserve requirement ratio, the credit supply capacity of these two types of institutions in specific areas will be effectively enhanced.

Wen Bin, chief economist of China Minsheng Bank, said that after the central bank cut the reserve requirement ratio by 0.5 percentage points, the average level of the overall deposit reserve ratio will be reduced from the original 6.6% to 6.2%, which will effectively smooth out capital fluctuations, stabilize credit expansion, promote the recovery of domestic demand, and effectively alleviate the pressure on bank interest rate spreads.

Mingming, chief economist of CITIC Securities, believes that although liquidity was relatively loose in April, the supply pressure of government bonds increased in May. The ultra-long-term special treasury bonds and special treasury bonds for commercial bank capital injection have both been implemented, which may contribute to a certain liquidity gap. The central bank chose to cut the reserve requirement ratio in May, on the one hand to further reduce the liability costs of commercial banks, and on the other hand to cooperate with the fiscal side.

Wu Chaoming, chief economist of Caixin Financial Holdings, said that the central bank's phased reduction of the deposit reserve ratio of auto finance companies and financial leasing companies from 5% to 0% will help to accurately enhance the financial credit supply capacity in areas such as auto consumption and equipment renewal investment, and also break the "implicit lower limit" of the deposit reserve ratio of 5%.

Looking ahead, economists believe that the People's Bank of China still has room to cut the reserve requirement ratio this year.

Li Chao, chief economist of Zheshang Securities, said that looking at the whole year, the central bank expects that monetary policy will maintain an easy tone in 2025, forming a policy synergy with fiscal policy and industrial policy. The central bank will still have a 50 basis point reserve requirement ratio cut and a 20 basis point interest rate cut throughout the year.

Goldman Sachs predicts that the central bank will implement another "double cut" in the fourth quarter, namely a 50 basis point cut in the reserve requirement ratio and a 10 basis point cut in interest rates, and there may be two additional 10 basis point cuts in interest rates in 2026.