Main points:
Event: on April 13, Li Keqiang chaired an executive meeting of the State Council to deploy policies and measures to promote consumption; Decide to further strengthen export tax rebate and other policies; It is pointed out that we should timely use monetary policy tools such as RRR reduction to increase financial support for the real economy and guide market players to reduce financing costs.
Core conclusion: it is expected that the RRR reduction will be implemented quickly (pay attention to the 15th), and the interest rate may be reduced later (the one-year LPR may be reduced by 5bp, pay attention to the 20th; the MLF may still be reduced, and the time point remains to be observed); In the short term, the role of bailing out entities is greater than expanding domestic demand. We should be vigilant against idling funds and borrowing new to repay the old, and the pulling effect on entities remains to be seen; It is good for stocks and bonds, but it may be short and weak.
What did the NSC say? Promote consumption, stabilize foreign trade and reduce reserve requirements. Policies will be accelerated.
After the two sessions, the national standing committee made comprehensive arrangements for the troika of monetary policy, fiscal policy and stimulating the economy around steady growth. It is not only the implementation of this year's work arrangement, but also reflects that under the repeated disturbance of Russia Ukraine conflict outside and epidemic situation inside, the policy may speed up the promotion.
The certainty of steady growth is becoming stronger and stronger: 3.14 the national standing committee determined the division of key tasks in the government work report and made comprehensive arrangements for the tasks and requirements of the two sessions; 3.21 the national standing committee will deploy the policy arrangement and timetable of tax rebate for retention, and reaffirm the decision of the financial committee meeting on 3.16 to maintain the stability of the capital market; 3.29 the national Standing Committee stressed that "we should stick to the goal and not relax", "policies to stabilize the economy should be carried out early and quickly, and plans to deal with greater uncertainty should be formulated", and we should speed up the issuance of bonds, advance finance, expand infrastructure and start 800 billion yuan of water conservancy projects; 4.6 the national Standing Committee put forward that "the complexity and uncertainty of China's external environment have increased, and some have exceeded expectations", issued special industry rescue policies, and used monetary policy tools such as refinancing to increase support for entities; 4.13 the national standing committee will deploy stable foreign trade policies such as promoting consumption, increasing export tax rebates, and timely use monetary policy tools such as RRR reduction to increase support for the real economy. On the whole, the national standing committee meeting since the two sessions has generally released several signals: first, there are more concerns about the economy, but "we will not relax our commitment to the goal", and the 5.5% probability still needs to be achieved; Second, the established policies will come out early and quickly, and plans will be made for problems beyond expectations, pointing to the acceleration of monetary and fiscal forces in the second quarter, and easing may be increased at the upcoming April Politburo meeting; Third, the policy focuses on accelerating the issuance of bonds, retaining the main body of the tax rebate and insurance market, rescuing industries in extreme poverty due to the epidemic, re lending, RRR reduction and other monetary policies; Fourth, the key to steady growth is infrastructure (including water conservancy), in addition to promoting consumption and stabilizing foreign trade.
Why should we lower the standard? When will it drop? How? Considering steady growth, stable bank liabilities, coordinated bond issuance, enterprise rescue under the epidemic and other considerations, as well as the requirements of the financial committee meeting and the national standing committee meeting on monetary policy since March, the RRR reduction is in line with expectations. From May to June, the Federal Reserve may raise interest rates continuously. It is expected that China will implement the RRR reduction as soon as around April 15. There is still 340bp left in the follow-up, and it may be more appropriate to reduce about 50bp this time.
From the perspective of reasons and background, the monetary policy has been stable and loose since the second half of 2021. After the RRR reduction in December 2021 and the interest rate reduction in January 2022, the market is still expected to reduce the RRR and interest rate again. The March 16 meeting of the financial committee, the April 6 Standing Committee and the April 13 Standing Committee clearly mentioned that "monetary policy should respond actively", and used monetary policy tools such as refinancing and RRR reduction to increase support for real enterprises, superimposing weak consumption, depressed real estate The impact of the epidemic on the economy is relatively large (we estimate that the impact of the epidemic on the economy of Q1 is about 0.5 percentage points. At present, the impact on the economy of Q2 may also be the same. See the near worries and foresight behind the "volume decline and price rise" in the report). At this time, the RRR reduction is in line with the requirements of stabilizing growth, stabilizing the cost of bank debt, cooperating with bond issuance, helping enterprises to rescue from the epidemic, and also in line with the recent policy deployment of the State Council.
From the point of time, in the past, the national Standing Committee raised and lowered the reserve requirement, which can be implemented in 1-2 weeks if it is slow and 2-3 days if it is fast. In view of the fact that the Federal Reserve may raise interest rates continuously from May to June and 50bp in May, China has a high probability of implementing the reduction in the reserve requirement in April, that is, near the expiration time point of MLF on Friday 15.
In terms of range and space, after the RRR reduction on December 6, 2021, the weighted average deposit reserve ratio of financial institutions is 8.4%; When considering the reduction, the central bank said that "except for some county legal person financial institutions that have implemented the 5% deposit reserve ratio, the deposit reserve ratio is generally reduced by 0.5 percentage points for other financial institutions", and the lower limit of the implied deposit reserve ratio may be about 5%. Therefore, the total space for subsequent RRR reduction may be 340bp, and the space is limited. This reduction of 50bp may be more appropriate.
Will there be interest rate cuts after the RRR reduction? After the RRR reduction, there may be interest rate reduction. The one-year LPR interest rate is expected to be reduced by 5bps. The five-year LPR may not move. There is still uncertainty about whether to reduce the MLF interest rate immediately.
First, in view of the analysis of the cost of bank liabilities in our previous report (see the report "calculation: is there room for LPR to cut interest rates again?"), Since 2021, various monetary policy instruments have saved about 137 billion yuan of bank capital costs, and correspondingly reduced the cost of bank liabilities by about 8.8bps. In December 2021, when the MLF was not reduced, after the one-year LPR was reduced by 5bps, there was still room for 3.8bps of follow-up bank costs. Superimposing this reduction may release about 1bp of space, which means that if the reduction is implemented, the corresponding one-year LPR may be reduced by 5bps.
Second, we have previously analyzed that since 2008, China has relaxed and the United States has tightened twice, 20142016 and 2018 respectively. During this period, the average interest rate spread between China and the United States was 129bp and 72bp; The lowest is 49bp and 24bp. When the interest rate difference between China and the United States is at a phased low, foreign capital flows out at some time points, but it is not very serious. Therefore, it is expected that the MLF interest rate will still be reduced in the future, but the time point is still uncertain.
What is the impact of the RRR reduction on the real economy and capital markets? Under the suppression of the epidemic, the relief effect may be greater than boosting demand. We should be vigilant against idling funds and borrowing new to repay the old. The pulling effect on the real economy remains to be seen. Taking history as a mirror, lowering the reserve requirement is good for stocks and bonds, but stocks are better than bonds, and the gem performs best. For this time, the previous expectation of RRR reduction has been strong, which is expected to be good for stocks and bonds, but it may be short and weak.
First, under the suppression of the epidemic, the relief effect may be greater than boosting demand. In view of the fact that the epidemic still has a drag on the economy and reduces the market vitality, the RRR reduction has limited short-term demand pull at this time, and the RRR reduction is a routine operation to release funds, which belongs to a relatively stable monetary policy. However, at this time, the RRR reduction will help to reduce the cost of bank liabilities and open the space for making profits for entities. In addition, the national standing committee will encourage large banks with high provision level to reduce the provision rate in an orderly manner (the last time was during the epidemic period, the national Standing Committee mentioned reducing the provision coverage of small and medium-sized banks on April 21, 2020). It will help banks release credit space and increase credit supply, which has obvious characteristics of helping enterprises to bail out.
Second, at present, the financing demand of real enterprises is poor and the risk appetite of banks is not high. We also need to be vigilant against the problems of idle funds and borrowing new for old, which is more likely to occur when liquidity is greatly loose in the short term. The driving effect of reducing reserve requirements and interest rates on the real economy remains to be seen. According to the BIS data, the proportion of borrowing new and repaying old loans in the new credit of Chinese enterprises continued to increase from 2008 to the third quarter of 2021, indicating that enterprises have increased debt repayment pressure and insufficient willingness to invest in new loans (see the report "periodic twists and turns of" wide credit "or the risk of" balance sheet decline ").
Third, the impact of RRR reduction on stocks and bonds? Since 2008, the reserve requirement has been reduced for 22 times. After the reduction, the short-term winning rate of Shanghai Composite Index and Shanghai Shenzhen 300 is high, and the medium and long-term winning rate has declined, but the increase has expanded. Gem has the best performance in the equity market. The winning rates in the next week, the next month and the next three months are 59%, 65% and 53%, with an average increase of 1.71%, 6.65% and 7.48%; Compared with the stock market, the bond yield seems to be more able to incorporate a certain price in before the RRR reduction. Specifically, the 10-year Treasury bond and 10-year CDB bond fell by an average of 4.7 and 5.3 BP in the week before the RRR reduction. After the RRR reduction, the bond market continued to decline, but the winning rate decreased. This law is not significant only in 2019. Overall, the RRR reduction is good for stocks and bonds, but stocks are better than bonds, and the gem performs best (see chart 5 for details). For this time, due to the strong expectation of the market for the RRR reduction, the current bond yield may have been price in the RRR reduction expectation to a certain extent, and the subsequent continuous downward range is limited; The stock market will be positive in the short term, but if it continues to rise in the future, it may need to be further boosted by events such as the release of overseas risks, the improvement of China's economic data, the turning point of real estate, and a stronger range of policy easing.
Risk tips
The economic downturn exceeded expectations and the implementation of policies was less than expected.