There are three reasons for the decline of LPR: first, the central bank comprehensively used a variety of monetary policy tools such as RRR reduction, turned in profits, MLF net investment and refinancing to maintain the stability and looseness of inter-bank liquidity and alleviate the liquidity constraints. Second, the central bank steadily carried out CBS operation, promoted banks to supplement capital with sustainable bonds as a breakthrough, encouraged large banks to reduce the provision coverage, and eased capital constraints. Third, the central bank launched the reform of deposit interest rate, included 10Y treasury bonds and one-year LPR in the pricing, promoted the marketization of deposit interest rate, reduced the motivation of banks to attract deposits at high interest rates, opened further downward space for deposit interest rate, and eased the interest rate constraints.
How to understand whether LPR will reduce length or not? 1) The five-year LPR was lowered by 15bp, reaching a record high, releasing a clear signal of stable growth and stable housing loans. At present, to avoid the credit collapse, the focus is to avoid the mortgage collapse. This time, the LPR is lowered, and the lower limit of housing mortgage interest rate is further reduced by 15bp. Superimposed with the deregulation of purchase and sales restrictions in various places, it is expected to drive the gradual recovery of real estate sales. 2) The one-year LPR remains unchanged. First, since this year, the infrastructure has covered the bottom, and the demand for short-term loans is not weak. Second, the central bank’s assistance to enterprises depends more on structural policy tools and is more accurate. At the same time, it can solve the problems of difficult and expensive financing. Third, the root cause of the credit crisis is not to reduce the loan demand, but to reduce the loan demand.
Relying solely on monetary policy to support economic growth is increasingly limited. Since the beginning of this year, China’s monetary policy has actively responded to the “triple pressure” and achieved positive results in the first stage. Including maintaining reasonable and sufficient liquidity, supporting the growth of social finance and credit from January to March, guiding the steady decline of loan interest rate, etc. Since April, China’s economic pressure has increased. Internally, it has been impacted by the epidemic. Externally, it is facing intensified geopolitical conflicts, and major developed economies have accelerated the tightening of monetary policy. In this context, what monetary policy can do has become more and more limited.
Facing difficulties, the economy needs to launch a heavy incremental policy. Steady growth requires more active and effective fiscal policies. First, the issuance of special bonds is ahead of schedule this year. In order to ensure the intensity of infrastructure investment in the second half of the year, further financial support is needed. Second, consumption and other industries are greatly affected by the epidemic and play an important supporting role in the economy, so they need policy relief urgently. Third, the public finance is stretched. In the future, the expenditure on anti epidemic such as normalized nucleic acid testing will only increase, but also need to be supplemented. We believe that the “incremental policy tool” may be the issuance of additional treasury bonds. The probability is in the second half of the year, and the scale may exceed trillion. It focuses on supporting infrastructure, consumption and the fight against the epidemic, which is expected to support the strong recovery of the economy and move towards the predetermined goal of the whole year.
Risk factors: the epidemic situation worsened again, and the policy promotion was not as expected.
