Core view:
On April 15, the central bank announced that in addition to reducing the deposit reserve ratio of financial institutions by 25 basis points. On the same day, the media reported that some small and medium-sized banks were encouraged to reduce the floating ceiling of deposit interest rates by 10 basis points. Previously, the lower limit of housing mortgage interest rate in some cities was also lowered. The reduction of reserve requirements and interest rates occurred as scheduled, but the degree and mode are quite different from market expectations. We believe that the choice of policy may reflect the central bank's balance in the face of multiple factors, such as the simultaneous use of multiple policy tools, the coordination of the interests of bank residents and depositors, and the tightening of the Federal Reserve's monetary policy. Considering many factors, we believe that LPR may still be lowered on the 20th of this month, but the interest rates of Omo and MLF in this cycle may be lowered or close to the end. Key investment points:
Is the intensity of reducing reserve requirements and interest rates too small?
Under the situation that the central bank has no intention to directly guide the decline of the market benchmark interest rate, the RRR reduction is just one of a variety of quantitative monetary policy tools to provide liquidity. Considering the use of other monetary policy tools and the current situation that liquidity has been "reasonably abundant", the RRR reduction of 25 BP is reasonable. The relatively low-key focus on the upper limit of deposit interest rate of some small and medium-sized banks and the interest rate reduction of mortgage loans in some cities is also an optimization choice after comprehensively considering the factors such as the low benchmark deposit interest rate itself, the need for proper maintenance of bank interests, large regional differences in the real estate market and so on.
Will there be a clear interest rate cut in the short term?
Since the central bank did not reduce the MLF interest rate on April 15, it is unlikely to reduce the benchmark interest rate of other policies in the short term, including Omo. However, due to the fact that guiding the deposit interest rate down and reducing the reserve requirement has reduced the cost of banks, and the State Council and the central bank require financial institutions to make profits to the real economy, we believe that it is still possible to reduce the LPR interest rate on the 20th of this month.
Does the Fed restrict China's monetary policy space?
After the RRR reduction, the central bank clearly proposed to "pay close attention to the monetary policy adjustment of major developed economies and take into account the internal and external balance". Whether China's monetary policy is constrained by the Federal Reserve and whether there is still room for easing have aroused concern. From the study of onshore and offshore RMB interest rate spread, exchange rate spread and the comparison with the interest rate of US Treasury bonds, we find that the rise of risk premium caused by the conflict between Russia and Ukraine and the decline of risk acceptance in politically sensitive periods may lead to the limitation of RMB exchange rate flexibility. In the case of incomplete capital control, monetary policy may have been constrained by the Fed's monetary policy - the recent interest rate cuts are all concentrated in the deposit and loan market, rather than the currency bond market more related to the exchange rate. In this way, unless the above factors subside, the interest rate cuts of Omo and MLF in this cycle may be coming to an end. We maintain a prudent view of interest rate debt.
Risk tip: the monetary policy is inconsistent with the expectation, the economy is lower than the expectation, and the geopolitical environment is inconsistent with the expectation
