At the beginning of the Year of the Loong, why did the central bank ＂cut interest rates＂
Economic Observer Network reporter Ouyang Xiaohong At the beginning of the Year of the Loong, a massive action focusing on steady growth and promoting high-quality development is beginning …
For example, Hunan Province launched a big discussion on emancipating the mind, and Guangdong Province called the provincial high-quality development conference; Macro-policies have also made renewed efforts to stabilize real estate.
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There are many bright spots in the start of China’s economy in 2024, such as A-share, financial and credit data, Spring Festival travel rush and consumption data exceeding expectations. On February 18th, the operating interest rate of Medium-term Lending Facility (MLF) was "on hold"; On February 20th, the one-year loan market quotation rate (LPR) announced by the central bank remained unchanged, and the LPR for more than five years was lowered by 25 basis points.
This asymmetric interest rate cut is not "late" but "to", and the rate cut has reached a record high, and the drop is quite profound.
Zhao Yaoting, global market strategist in Jing Shun Asia-Pacific region (excluding Japan), analyzed that this (interest rate cut) was the first time that the Bank of China lowered the LPR since last summer, and it exceeded the expectation by 10-15 basis points. This shows that the Bank of China is selectively using monetary instruments, and has not turned to a broad easing policy to stimulate the economy.
Zhao Yaoting believes that this interest rate cut will undoubtedly release a signal to the market: it shows that policy makers are seriously considering providing more support for real estate. After last year’s round of downward adjustment, the current 5-year LPR has been at a historical low. Coupled with recent measures, including providing more financing for developers and providing state-owned bank loans for unfinished projects, these measures are expected to lay a more solid foundation for the real estate market.
According to Lu Ting, chief economist of Nomura Securities in China, since the 5-year LPR is mainly used as the reference interest rate of mortgage loans, this LPR reduction is obviously aimed at stimulating the depressed real estate market. Although the market expected this LPR reduction, the reduction was far greater than the market expectation of about 10 basis points. Since the LPR reform in August 2019, the five-year LPR has been lowered by 25 basis points, the largest adjustment in history.
Lu Ting said: "Although this rate cut is a little late, it is better than never and should be welcomed."
Why cut interest rates at this time? On the one hand, or because of the weak real estate sales in the beginning of the year. According to the team of chief economists of Ping An Securities, from the beginning of this year to February 19, the sales area of new houses in 61 sample cities counted by Ping An Securities dropped by 29% compared with the same period of last year; According to Kerry’s statistics, the sales amount of the top 100 real estate enterprises in January decreased by 34.2% year-on-year. During the Spring Festival holiday, domestic travel was hot and consumption increased, but the sales of new houses were not satisfactory. The growth rate of commercial housing sales from the first day of the first month to the tenth day of the first month was -43% year-on-year, and the "absence" of returning home buyers in the fourth and fifth tier cities was a drag.
On the other hand, the real interest rate rose to near the potential growth rate. Zhong Zhengsheng, chief economist of Ping An Securities, believes that although the nominal interest rates of general loans and personal mortgage loans all fell to historical lows in the fourth quarter of 2023, the inflation-adjusted real interest rate level is still high. In January 2024, the year-on-year growth rate of CPI was -0.8%, down 0.5 percentage point from last month, which means that the nominal interest rate of general loans of 4.35% will correspond to the real interest rate of 5.15%, or it has exceeded the current potential GDP growth rate in China, which is not conducive to the full release of endogenous financing demand.
According to Xiong Yuan, chief economist of Guosheng Securities, the interest rate cut is aimed at stabilizing confidence, reducing costs, stabilizing real estate and expanding domestic demand. In essence, the core problems of the current economy are still weak endogenous motivation and insufficient demand, and more combination punches are still needed for steady growth. Since the end of last year, the downward pressure on the economy has continued to appear, especially the price has turned negative again, the real estate is sluggish, and consumption is weak. The core reasons behind it are still insufficient demand and weak endogenous motivation. At the end of last year, the Central Economic Work Conference also put the problem of "insufficient effective demand" in the first place, emphasizing the need to "focus on expanding domestic demand".
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For this asymmetric interest rate cut, Zhao Wei, chief economist of Guojin Securities, believes that it is "stable growth, stable real estate, and debt assistance".
Zhaowei believes that the LPR over five years will be lowered beyond expectations, further releasing the signal of "steady growth". The flat repair of physical demand has been reflected since last year, especially the real estate boom has continued to decline. The high-frequency data at the beginning of this year can also reflect that the sales area of commercial housing in 30 large and medium-sized cities was 10.1 million square meters 50 days before the opening of the year, which was more than 40% lower than the average of the previous four years. As the anchor of medium-and long-term loan pricing, the LPR for more than five years will be lowered or further reduced.
In addition to releasing "stable" signals in some areas, zhaowei analyzed that the downward adjustment of long-term LPR will also help to alleviate the pressure of stock debt and stimulate demand. According to the pricing framework of LPR, stock loans will be adjusted with LPR within one year, so as to alleviate the stock debt pressure of enterprises and urban investment platforms. Compared with existing loans, LPR has lowered or directly driven down the financing cost of new medium and long-term loans such as infrastructure and manufacturing. For example, since 2022, the five-year LPR has been lowered by 70 basis points, and the weighted interest rate of loans has dropped by over 90 basis points.
While the "three steps of steady growth" is going on, zhaowei analyzed that the potential risks in the bond market may be accumulating and the stock market sentiment is expected to continue to improve.
What is "three steps to steady growth"? The logic is that, in the first step, the monetary easing will be overweight, and the RRR will be lowered and the interest rate will be lowered; The second step is to speed up the start-up and construction of infrastructure and industrial projects represented by major projects, so as to improve the demand of entities; In the third step, the real demand will go out of the "negative cycle" of contraction and the economic expectation will be restored, and the GDP growth rate will return to the reasonable growth range of 5%-5.5%.
In fact, since the fourth quarter of 2023, the decision-makers have taken a series of measures to stabilize economic growth, including the implementation of trillion-dollar national debt projects and giving priority to supporting the "three major projects" of the real estate industry. In terms of monetary policy, lowering the RRR and cutting interest rates, releasing the local debt quota ahead of schedule and speeding up the issuance provided the necessary financing support for the government, thus providing financial guarantee for steady growth. Together, these measures constitute the first step of the steady growth strategy, aiming at providing direct economic stimulus by increasing government financing and monetary easing.
Zhaowei believes that the bond market may face new challenges and opportunities in the process of "three steps of steady growth". In the short term, the stratification of funds and the limitation of the downside interest rate of non-bank funds may lead to the fluctuation of market sentiment. In the medium term, with the gradual implementation of the strategy of "three steps of steady growth", economic recovery may lead to certain negative factors in the bond market. At the same time, the valuation level of the equity market is at a historical low level. With the improvement of fundamentals and the release of risks, market sentiment is expected to continue to improve.
Then, will the real estate market respond positively to the big move of the central bank to cut interest rates this time?
Nomura Securities assessed that only reducing the five-year LPR is not enough to reverse the decline of the real estate industry. Due to the influence of multiple downward spirals, the actual effect of this interest rate cut may be limited by the small discount provided by banks to protect profit margins. "Management will have to take more measures to rescue development projects to stabilize the real estate market."
In fact, at the beginning of 2024, the real estate market in China showed obvious signs of weakness. The sales area of new houses and the sales of real estate enterprises declined rapidly, especially in the fourth-and fifth-tier cities, and the demand for returning home was reduced, which may have a great drag on the market.
Lu Ting believes that the real impact of this interest rate cut will be reflected in the outstanding loans of 38 trillion yuan with the 5-year LPR as the benchmark interest rate. These loans will not be reset until January 1, 2025 (more than ten months from now), and a 25 basis point interest rate cut will reduce the bank’s profit margin by about 95 billion yuan every year.
It is true that commercial banks will need to find a better balance between maintaining profit levels and supporting economic growth in the future. This may mean that banks need to adjust their loan structure, asset allocation and risk management strategies to adapt to the ever-changing market environment and policy orientation.
On the whole, Zhao Yaoting believes that this interest rate cut and the overall measures taken by policy makers to boost investor confidence and market sentiment can complement each other, and continuous stimulus measures are expected to continue the recent market rally. Looking ahead, it is expected that monetary easing will continue to provide support for the real estate market, but it is expected that the Bank of China may not implement extensive easing policy, because it may put pressure on the RMB.
Or based on this, although the LPR quotation was obviously adjusted in February, the MLF interest rate remained unchanged. The LPR quotation of commercial banks is presented in the form of "MLF+ spread". In this regard, Zhong Zhengsheng believes that keeping the MLF policy interest rate unchanged in the short term will help maintain the relative stability of the RMB exchange rate in the context of the obvious adjustment of the Fed’s interest rate cut expectations.
Some experts also believe that in the long run, the relationship between MLF and LPR should be diluted. LPR has a greater impact on the real economy because it is the reference benchmark for the financing cost of the real economy.
According to Xiong Yuan’s analysis, unlike in the past, LPR usually followed the MLF interest rate downward adjustment. This 5-year LPR downward adjustment was mainly driven by the downward adjustment of deposit interest rate, but the MLF interest rate did not move, which may be the subtle balance of the policy on "stable growth VS stable exchange rate and prevention of fund idling". Looking back, "money is not everything", substantial steady growth and wide credit urgently need to further increase the demand-side policy, and there is still room for subsequent RRR cuts and interest rate cuts.
Based on this interest rate cut, Lu Ting predicted that the Bank of China would further cut interest rates for 7-day OMO (open market operation), 1-year MLF and 1-year LPR in 2024, and predicted that the LPR over 5 years would be further lowered by 20 basis points to 3.75% during the year. "With the adjustment of the policy interest rate, the bank deposit interest rate may also be lowered accordingly."
In terms of asset allocation, Xiong Yuan believes that this interest rate cut will help boost confidence, reduce the cost of entity financing, and be beneficial to the equity market; For the bond market, the actual impact remains to be seen. On the one hand, after the LPR is lowered, the loan interest rate will also be lowered, which will improve the yield/price ratio of bonds relative to credit; On the other hand, this interest rate cut will also help stabilize real estate and broaden credit. If the subsequent demand improves beyond expectations, the bond interest rate will be under pressure.