Events:
The people's Bank of China decided to reduce the deposit reserve ratio of financial institutions by 0.25 percentage points on April 25, 2022 (excluding financial institutions that have implemented the 5% deposit reserve ratio). In order to increase the support for small and micro enterprises and "agriculture, rural areas and farmers", for urban commercial banks without inter provincial operation and agricultural commercial banks with deposit reserve ratio higher than 5%, an additional 0.25 percentage point will be reduced on the basis of reducing the deposit reserve ratio by 0.25 percentage point.
Comments:
Since the executive meeting of the State Council on April 13 proposed "timely use of RRR reduction and other monetary policy tools" and gave a notice of RRR reduction, the market has full expectations for the implementation of RRR reduction. This RRR reduction is a small-scale comprehensive RRR reduction (only 0.25% lower than the usual RRR reduction range) + targeted RRR reduction (targeted RRR reduction for some urban commercial banks and rural commercial banks to support small and micro enterprises and "agriculture, rural areas and farmers"), releasing a total of about 530 billion yuan of long-term funds, slightly lower than the market expectation. On April 15, the central bank continued the equal parity of MLF and reverse repo. The market expectation of interest rate reduction failed. Superimposed on the fact that the scale of this RRR reduction was weaker than expected, the central bank showed caution about policy easing. We think this caution can be understood from two aspects.
One possibility is that the yield of China US 10-year Treasury bonds has been upside down, and the feasibility of easing China's monetary policy is reduced under the rapid tightening of external liquidity. The upside down of interest rate spread between China and the United States mainly indirectly restricts China's monetary policy through the channels of international capital flow and RMB exchange rate. Recently, although there have been some capital outflows in the A-share and bond markets, the RMB exchange rate has remained stable. To a large extent, the capital inflow under the current account has provided resilience for the RMB. However, the rebound of China's epidemic has hindered exports, and the continuous liberalization of overseas epidemic prevention and control is conducive to the recovery of supply capacity, which will put downward pressure on China's export growth, and the support for the RMB may gradually weaken. In this case, with the upside down of long-term interest rates in China and the United States, the interest rate spread of short-term policy interest rates will also narrow rapidly, and the outflow of funds may increase the pressure of RMB devaluation, thus restricting the central bank's monetary easing. When answering reporters' questions this time, the central bank said that it "pays close attention to the monetary policy adjustment of major developed economies and takes into account internal and external balance", which reflects the concerns of the central bank in this regard. From this perspective, the probability of continued easing of monetary policy, including interest rate cuts, has decreased.
Another possibility is that the central bank's easing is weak because the need for strong easing is not strong.
On the one hand, it may be because the actual economic performance is better than expected. Since March, international geopolitical conflicts and China's epidemic have posed all-round pressure on China's economic operation. In March, the official and Caixin manufacturing and non manufacturing PMI fell below the boom and bust line. On April 6, the executive meeting of the State Council proposed that the complexity and uncertainty of China's external environment increased, and some exceeded expectations. The above factors lead to the market's pessimistic expectation of the economic situation, and the market's consensus expectation of GDP in the first quarter has fallen to less than 5%. The first quarter economic data will be released next Monday. At that time, it can verify whether the central bank only implements weak easing due to strong economic toughness and better than expected data. In this case, the probability of subsequent interest rate cuts has also decreased.
On the other hand, the weak necessity may be due to the fact that the main resistance to promoting wide credit lies in the financing demand rather than the financing supply of banks, and the role of RRR reduction is more reflected in the financing supply side, that is, by easing the capital of commercial banks and increasing the credit delivery capacity of banks. Therefore, the necessity of large-scale RRR reduction is not strong. However, the interest rate cut can directly boost the credit demand of enterprises and residents by driving the decline of loan interest rate. The positive effect is more reflected in the financing demand side. Therefore, it is impossible to explain why the interest rate is not cut from this perspective alone, which needs to be explained in combination with the reduction of feasibility. Although the RRR reduction reduced the capital cost of financial institutions by about 6.5 billion yuan per year, which helped to reduce the comprehensive financing cost of society through the transmission of financial institutions, the RRR reduction was 0.5 percentage points in July and December last year, releasing a total of 2.2 trillion yuan of long-term funds. The superposition of the effects promoted the one-year LPR interest rate reduction by 5bp in December last year. In contrast, it is more difficult for this small-scale RRR reduction to drive the LPR interest rate downward.
Based on the above possibilities, we believe that the consideration of weak easing by the central bank is mainly due to the feasibility, followed by the second point of necessity, and the first point of necessity, that is, the economy was not significantly impacted by the epidemic in the first quarter, and the probability of data being better than expected is low. At present, the subsequent interest rate reduction expectation can not be completely falsified, and the market interest rate reduction expectation will continue to exist, but will be weakened.
As the capital market has already paid in advance for the RRR reduction, the boots of this small-scale RRR reduction have landed, and the expectation of interest rate reduction has temporarily failed, and the central bank has not given guidance on further easing. Instead, the latest policy signal implies a decline in the probability of further easing. Therefore, if there is no further favorable policy at the weekend, the market may begin to reflect the impact of less easing than expected next Monday. Looking back, one is to observe monetary policy
Whether there will be important marginal change signals, on the other hand, focus on the confirmation of epidemic peak and economic bottom. Risk tip: the change of epidemic situation exceeded expectations, the change of economic fundamentals exceeded expectations, and the change of monetary policy exceeded expectations
