Event: 1 RRR reduction: the central bank 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). For urban commercial banks that do not operate across provinces and agricultural commercial banks with a deposit reserve ratio higher than 5%, it will reduce the deposit reserve ratio by an additional 0.25 percentage points on the basis of reducing the deposit reserve ratio by 0.25 percentage points. After the reduction, the weighted average deposit reserve ratio of financial institutions was 8.1%, releasing about 530 billion yuan of long-term funds. 2. Targeted interest rate cut: according to the financial Associated Press, the self-discipline mechanism of market interest rate pricing recently held a meeting to encourage the floating upper limit of deposit interest rate of small and medium-sized banks to be lowered by about 10 basis points (BP); This requirement should not be mandatory, but the bank making the adjustment may be beneficial to its macro Prudential assessment (MPA).
Core conclusion: the overall RRR reduction of 25bp + directional RRR reduction of 50bp is restrained, which is lower than the market expectation. It may be due to the consideration of abundant liquidity, policy space and peripheral environment. The policy reflects the characteristics of structural and epidemic relief, with limited demand in the short term. We should be vigilant against idling funds and borrowing new to repay the old. The central bank mentioned that it pays attention to prices and internal and external equilibrium, but we believe that the price performance excluding the cost of raw materials continues to be CPI deflation + PPI inflation, "the core of stagflation is deflation", pointing to poor total demand, and the subsequent currency may still be relaxed at a small pace. The calculation shows that the LPR may be lowered as soon as this month (3.8 + 0.5 + others ≈ 5bp). If it does not decline, the subsequent window is still in progress; MLF is still possible to be lowered, and the time point needs to be observed; The total space for subsequent RRR reduction may be 310bp, the space for comprehensive RRR reduction may be more limited, and the step size of RRR reduction may also be adjusted to 25bp. This RRR reduction is expected to be good for equity, but the range is limited; Be neutral to the bond market and be vigilant against the rise of subsequent interest rates.
The RRR reduction is in line with the recent high-level policy guidance and market expectations.
Recently, the high-level meeting frequently mentioned the active response of monetary policy, and the RRR reduction is in line with policy guidance and market expectations. 4.6 the national standing committee pointed out that "we should make timely and flexible use of various monetary policy tools such as refinancing, give better play to the dual functions of aggregate and structure, and increase support for the real economy". 4.13 the national Standing Committee and 4.14 the first quarter financial statistics press conference of the central bank pointed out that "we should make timely use of reserve requirement reduction and other monetary policy tools to further increase financial support for the real economy". There are geopolitical risk disturbances outside the superposition, Due to the impact of the epidemic and other factors, the policy needs to be increased to stabilize growth. This RRR reduction is in line with market expectations.
The range of RRR reduction was restrained, which was lower than the market expectation; It should be due to the consideration of abundant liquidity, policy space, overseas environment, etc.
The overall reserve requirement reduction of 25bp + targeted reserve requirement reduction of 50bp was restrained. Superimposed on the fact that the central bank did not cut the MLF interest rate, the "targeted interest rate reduction" of bank deposit interest rate was also limited, which was generally lower than the market expectation. As for the central bank's RRR reduction, compared with most of the adjustment ranges of 50-100bp in the past, the overall RRR reduction of 25bp is smaller; In terms of "targeted interest rate reduction", the reduction of the floating upper limit of deposit interest rate is similar to the disguised targeted interest rate reduction, but the intensity is limited this time. One is for small and medium-sized banks, and the other is not mandatory. Compared with the 30-60bp reduction in medium and long-term deposit interest rates of most banks after the optimization of deposit self-discipline ceiling in June 2021, although this adjustment can alleviate the pressure on bank net interest margin, the range is less than that of last year.
The main considerations of amplitude restraint are as follows: 1 Dr007 remains below the 7-day reverse repo rate, and the current liquidity is at a reasonable and sufficient level. 2. Reserved space. In recent times, the central bank said that "financial institutions that have implemented the 5% deposit reserve ratio are not included", and the lower limit of the implied deposit reserve ratio may be about 5%. Therefore, after the RRR reduction in December 2021, the weighted average deposit reserve ratio of financial institutions is 8.4%, implying that the total space for subsequent RRR reduction may be 340bp; After this RRR reduction, the weighted average reserve ratio of financial institutions is 8.1%, and the space is further reduced to 310bp, and the space for comprehensive RRR reduction may be lower. 3. The central bank said that it was concerned about "price" and "monetary policy adjustment in developed economies, taking into account internal and external balance". Faced with the acceleration of the Fed's interest rate increase and contraction, the possibility of continuous interest rate increase and range of 50bp from May to June, the upside down of interest rate spread between China and the United States, and considering the factors such as stabilizing exchange rate and international capital flow, the central bank chose to "jog in small steps".
Slightly loose, how does it work? Partial structural and epidemic relief have limited impact on the real economy.
Although the RRR reduction range is small, if the superposition of large banks orderly reduce the provision rate, scientific and technological innovation and inclusive pension two special refinancing, increasing small refinancing to support agriculture and other monetary policy operations, from a comprehensive point of view, the recent monetary policy has taken many measures at the same time, and the structural characteristics have been strengthened. Therefore, on the whole, this RRR reduction will help stabilize the cost of bank liabilities and enhance the capital allocation capacity of financial institutions; Reduce enterprise financing costs, especially increase support for industries and small, medium and micro enterprises seriously affected by the epidemic; Hedge the negative impact of the epidemic, stabilize the real economy and achieve steady growth. However, in view of the poor financing demand of entities and the suppression of the epidemic on the economy, it is expected that the short-term RRR reduction will have a greater role in relieving entities than boosting domestic demand. In the period of loose liquidity and poor demand for physical financing, it is even more necessary to be vigilant against capital idling and borrowing new for old, which may also be the internal consideration of the central bank's failure to make greater easing at one time.
How to understand and pay attention to price stability? Excluding the cost of raw materials, we have been facing the situation of CPI deflation and PPI inflation for a long time. "The core of stagflation is deflation". Therefore, it is expected that the easing window has not been closed. In the future, we may relax by jogging, and then reduce the reserve requirement and interest rate.
Although the central bank raised concerns about prices and overseas monetary policies this time, we believe that "the core of stagflation is deflation", and the window for further RRR and interest rate cuts has not been closed, but will jog in small steps.
1. How much pressure is there on Chinese prices? We calculate that excluding the cost of raw materials, China is CPI deflation and PPI inflation. The essence of "stagflation" is deflation.
Since last year, China's inflation pressure has mainly focused on raw materials, which has a great relationship with the mismatch between supply and demand caused by the dislocation of the epidemic, the dual control of China's energy consumption and the conflict between Russia and Ukraine since this year. If measured by excluding the cost of raw materials, it may more directly reflect the current demand level and price pressure in China.
After excluding the impact of raw material costs in PPI and CPI and subtracting the December average, greater than 0 represents inflation and less than 0 represents deflation. After excluding the impact of inflation on CPI, PPI and CPI, the impact of CPI on the cost of raw materials and communication tools on the economy year-on-year is divided into PPI and CPI, excluding the impact of CPI on the cost of raw materials and utilities, excluding the impact of CPI on the economy. According to the calculation results, it can be found that from June 2021 to February 2022, PPI inflation, and from April 2020 to mid February 2022, except for the three months from October 2021 to December 2021, CPI is in the period of deflation. It can be considered that the current situation is generally in the period of PPI inflation and CPI deflation. CPI deflation represents that the current consumer side is still weak. PPI inflation shows that the price has been transmitted to the downstream of industry except for the price rise of raw materials at the production side. It is reasonable to speculate that if the rise in vegetable and grain prices under the epidemic and the conflict between Russia and Ukraine are further excluded from CPI, the demand side represented by CPI may be further weakened.
From this perspective, China's "inflation" can not be solved through austerity, but in essence represents the deficiency of China's total demand, which requires loose policies to boost the real economy.
2. Historically, in the CPI deflation and PPI inflation period excluding the cost of raw materials, the overall economic growth is relatively sluggish, the export and investment in the troika are better, and the consumption is worse. At the policy level, it is manifested in wide currency, tight finance and tight credit. However, under the current circumstances, the policy needs to be "stable", the wide currency window has not been closed, and the finance also needs to speed up expenditure and investment, so as to realize wide credit; Steady growth falls in expanding infrastructure, stabilizing real estate and promoting consumption.
3. After the RRR reduction, there may be interest rate reduction and monetary policy jogging in small steps.
After the RRR reduction, there may be interest rate cuts and monetary policy jogging in small steps. The one-year LPR interest rate is expected to be lowered by 5bps; There is still the possibility of reducing MLF interest rate, and the time point remains to be observed; The range of subsequent standard reduction may be adjusted to 25bp at a time.
Behind structural inflation and deflation is the repeated disturbance to the supply and demand side of the economy caused by the conflict between Russia and Ukraine and the internal epidemic. However, the real demand is still poor, and policies need to be further relaxed to stabilize growth. Externally, although the upside down of China US interest rate spread has certain pressure on the exchange rate, balance of payments and capital outflow, if China's economy faces greater downward pressure, it will also drag down the above problems. At present, consumption is still weak, real estate is depressed and the epidemic has a great impact on the economy of Q1 and Q2. The primary goal of follow-up monetary policy should still focus on stabilizing employment and growth. Therefore, we maintain the view in the previous report "the RRR reduction is coming, and then what? - Interpretation of the April 13 standing committee", that is, since 2021, there is still 3.8bps space for various monetary policy instruments to reduce the cost of bank liabilities. Adding this RRR reduction may release about 0.5bp space, and the reduction of the upper limit of bank deposit interest rate will further reduce the cost of bank liabilities, which means that the one-year LPR may be reduced by 5bps as soon as this month. If it is not reduced, The follow-up space is also.
In addition, the subsequent MLF may still be reduced, and the time point remains to be observed. In the case of accelerated tightening by the Federal Reserve and upside down interest rate spread between China and the United States, the follow-up monetary policy is more likely to jog in small steps, leaving room, and the rate of RRR reduction may also be adjusted to 25bp at a time.
What is the impact of the RRR reduction on the capital market? Stocks are short and weak, and interest rates may rise after shocks.
In the previous report "the RRR reduction is coming, and then what? -- Interpretation of the national Standing Committee on April 13", we combed the historical laws and found that the RRR reduction is good for stocks and bonds, but stocks are better than bonds, and the gem performs best. For this time, given that the RRR reduction is generally lower than expected, it is expected to be good for the stock market, but the boost is limited. If it is to continue 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 arrival of an inflection point in real estate, a stronger range of policy easing and so on; As the bond market usually responds to the expectation of RRR reduction in advance, the less than expected RRR reduction may bring pressure on the bond market adjustment. It is expected that the interest rate will fluctuate in the short term and tend to rise in the future.
Risk tips
The economic downturn exceeded expectations and the implementation of policies was less than expected.
