On April 15, 2022, the central bank announced a comprehensive RRR reduction of 0.25%. The implementation of RRR reduction is in line with our prediction. We believe that the core purpose is to actively promote credit relief, promote the reduction of comprehensive social financing costs, and hedge the negative impact of the epidemic on economic fundamentals. This RRR reduction is slightly lower, which reflects that the central bank pays close attention to price stability and balance of payments, which is in line with our previous judgment that "the balance of payments entered the observation period in the second quarter". Although the RRR reduction rate is slightly lower, we believe that other easing policies will be introduced in the future. We judge that the central bank still has the probability of reducing interest rates. The current interest rate reduction window period is from May 16 to assist in reducing costs and broadening credit. For fiscal policy, in addition to the continuous advance force of various tools, we expect to issue special treasury bonds as a supplementary supporting policy again to actively respond to the negative impact of the epidemic.
As for the impact on the market, the monetary policy continues the combination of "wide money + wide credit". We expect that the actual year-on-year growth rate of GDP in the first quarter may significantly exceed the market expectation by 5.4%. The equity market is still optimistic about the steady growth sectors, such as finance, real estate, construction, building materials, etc; For the fixed income market, under the above logic, it is expected that the yield of 10-year Treasury bonds will remain in the range of 2.7% - 2.9%, the peak in the second quarter will be 2.9%, and the Treasury bond yield curve will return to steepening.
I. the central bank's RRR reduction is in line with expectations
On April 15, 2022, the central bank announced that in order to support the development of the real economy and promote the steady decline of comprehensive financing costs, 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), and for urban commercial banks that do not operate across provinces and agricultural commercial banks with a deposit reserve ratio higher than 5%, On the basis of reducing the deposit reserve ratio by 0.25 percentage points, an additional 0.25 percentage points will be reduced. The RRR reduction fully verified our previous judgment. In our report "financial data in February: increasing the probability of RRR reduction by the central bank" on March 11, we clearly pointed out that there is a large probability of RRR reduction by the central bank. In the report "what is the trend of wide currency and credit under the interpretation of the epidemic", we put forward three forward-looking signals for observing RRR reduction, of which the most important is "the signal of RRR reduction released by the national standing committee". At present, the RRR reduction by the central bank has been implemented and the deployment of the national Standing Committee has been implemented.
The RRR reduction is a comprehensive RRR reduction. The central bank disclosed that the RRR reduction released a total of about 530 billion yuan of long-term funds. The central bank proposed that the purpose of the RRR reduction is to optimize the capital structure of financial institutions and increase the long-term stable capital sources of financial institutions. The second is to guide financial institutions to actively use the RRR reduction funds to support industries and small, medium and micro enterprises seriously affected by the epidemic. The third is to reduce the capital cost of financial institutions by about 6.5 billion yuan per year, Transmission through financial institutions can promote the reduction of social comprehensive financing costs. We believe that the RRR reduction will help actively promote credit easing and hedge the negative impact of the epidemic on economic fundamentals. Recently, there have been many outbreaks in China, and there are many concentrated outbreaks in the country. It is the largest local outbreak since the Wuhan epidemic. There is great uncertainty about the impact on the economy. At this time, the RRR reduction reflects the timely force of the policy.
Second, the focus of monetary policy is credit
On April 6, the national Standing Committee proposed that "we should make timely and flexible use of a variety of monetary policy tools, give better play to the dual functions of aggregate and structure, and increase support for the real economy." At present, the RRR reduction has been implemented. We believe that the current policy intention of stabilizing growth through wide credit is still clear, and the focus of monetary policy is still wide credit. Credit is the most effective means to broaden credit and an effective way to promote enterprises to expand capital expenditure and prevent financial idling. This year, "expanding the scale of new loans" also appeared for the first time in the government work report, reflecting the determination of the policy level to stabilize credit and credit. As for the carrier of broad credit, we believe that manufacturing, real estate, infrastructure and other directions will continue to make efforts to broaden credit. The relevant logic is:
1. Under the pattern of "steady growth of new manufacturing", it is expected that manufacturing investment will replace the traditional infrastructure and real estate investment and become the core driving force of the economy, which is mainly supported by the logic of strengthening the chain, supplementing the chain and rebuilding the industrial foundation, especially the new energy of the industry. In this process, a large number of incremental investment needs in the fields of equipment renewal and technological transformation will be formed. The policy layer continued to emphasize the promotion of medium and long-term loans in the manufacturing industry. In 2019, the central bank increased the proportion of medium and long-term loans in the MPA assessment, and increased the weight in 2020. In 2021, the policy continued, and continued to emphasize increasing financial support for the manufacturing industry. At the end of last year, the central bank created a carbon emission reduction policy tool to provide targeted financial support for the field of carbon emission reduction, On June 4 this year, China's standing committee proposed to continue to promote the rapid growth of medium and long-term loans to the manufacturing industry. The year-on-year growth of 20.9% in manufacturing investment from January to February has been realized, and we expect the annual growth rate to reach 11.1%.
2. Real estate investment is expected to remain resilient, with an annual growth rate of 5.4%. Urban renewal contains major opportunities and is also a major market expectation; In the field of infrastructure, in 2022, the investment scale of local major projects will be increased and the pace will be ahead. The strength of the investment scale in the first half of the year will also contribute to credit release.
III. The reserve requirement reduction rate is slightly lower. The central bank pays close attention to price stability and balance of payments
The rate of this RRR reduction is only 0.25%. There is no case in the previous RRR reduction. In answering reporters' questions, the central bank proposed relevant comprehensive considerations after the RRR reduction, including: first, pay close attention to the changes of price trend and maintain the overall stability of prices. Second, pay close attention to the adjustment of monetary policy in major developed economies, taking into account internal and external balance. We believe that the current monetary policy takes steady growth as the primary goal, but we also pay close attention to price stability and balance of payments.
In terms of prices, the CPI in March was + 1.5% year-on-year (the previous value was 0.9%). The gap between food supply and demand has driven the CPI to rise significantly in the short term. In particular, the recurrence of the epidemic has led to stricter sealing and control measures in many places, and the subsequent impact on CPI remains uncertain; Affected by the situation in Ukraine and Russia, the prices of crude oil and nonferrous metals continued to rise, the coal price rebounded under the tight supply and demand pattern, and the rise of upstream prices also promoted PPI, slowing down its downward speed.
In terms of balance of payments, at present, the interest rate difference between China and the United States has been upside down. In the interpretation of the foreign reserve data in March, the key hint of "the second quarter of balance of payments entered the observation period" is that the fluctuation range of RMB exchange rate in the second quarter is expected to be larger than that at present, and the second quarter of balance of payments entered the observation period. We believe that the balance of payments is more important than the exchange rate. As of the end of March, China's official foreign exchange reserves were 318799 billion US dollars, which is still a margin of safety from the warning line of 3 trillion US dollars. From the perspective of the security of foreign reserves, the short-term pressure is relatively controllable. However, in the second quarter as a whole, the fluctuation range of RMB exchange rate is expected to increase compared with the current one. If the capital outflow and RMB exchange rate depreciation form a mutually reinforcing negative cycle, resulting in the risk of foreign reserves falling below the $3 trillion threshold, we believe that the balance of payments may become an important consideration factor of monetary policy and disturb policy decisions. Although the rate of RRR reduction is slightly lower, we believe that other easing policies will be introduced in the future. We judge that the central bank still has the probability of reducing interest rates. For fiscal policy, in addition to the continuous advance force of various tools, we expect to issue special treasury bonds as a supplementary policy to actively respond to the negative impact of the epidemic.
IV. it is expected that the current period to May 16 is the window period for interest rate reduction, in order to reduce costs and assist in credit easing
We insist on the report of April 12, "what is the trend of broad currency and credit under the interpretation of the epidemic?" From the point of view of the central bank, dr007 has recorded a value below 2.1% for several days since the beginning of April, and most days fluctuate at a low level near 1.9%. We mainly suggest that the current period to May 16 is the window period for the central bank to cut interest rates. The central bank has a large probability of cutting interest rates. Considering the factors such as the Fed's interest rate increase, the range of interest rate reduction should not be too large, and the interest rate reduction is expected to be about 10bp.
The purpose of interest rate reduction is: 1. To help enterprises to rescue and reduce the financing cost of enterprises; 2. Reducing financing costs will also stimulate the demand for loans in the real sector, and "wide money" will cooperate with "wide credit" to maintain economic fundamentals. After the central bank reduces the policy interest rate, LPR will also decline.
V. impact on the market: it is expected that the yield of 10-year Treasury bonds will remain in the range of 2.7% - 2.9%. At present, the standard reduction is implemented. It is expected that the monetary policy will continue the combination of "wide money + wide credit". Superimposed, we expect that the actual year-on-year growth rate of GDP in the first quarter may significantly exceed the market expectation by 5.4%. The equity market is still optimistic about steady growth sectors, such as finance, real estate, construction, building materials, etc; For the fixed income market, under the above logic, it is expected that the yield of 10-year Treasury bonds will fluctuate in the range of 2.7% - 2.9%, and the peak in the second quarter is 2.9%. We judge that the probability of interest rate reduction is also large, which has greater traction on the short-term interest rate, that is, the decline range of short-term interest rate is greater. It is expected that the yield curve of treasury bonds will return to steepening. In particular, if LPR cuts interest rates asymmetrically between different periods, it will also increase the steepening process of yield curve.
Risk tip: the international balance of payments entered the observation period in the second quarter. If the interest rate difference between China and the United States is further reversed sharply, it will trigger a negative cycle of large-scale capital outflow and exchange rate depreciation. Monetary policy may focus on the balance of payments.
