On May 20, the LPR for one-year period was 3.7%, the last time was 3.7%, the LPR for five-year period and above was 4.45%, and the last time was 4.6%. The LPR reduction was in line with our expectations, but it was not adjusted for one-year period and the reduction range for five-year period and above exceeded our expectations. We believe that the “asymmetric interest rate reduction” of LPR reflects, on the one hand, the downward movement of the market interest rate center and the reduction of time deposit interest rates of many banks to the asset side since April. On the other hand, it also corrects the fact that the past adjustment range of five-year period has been lower than that of one-year period due to the strict regulation of real estate since the reform of LPR mechanism in August 2019. The core purpose is to broaden credit and optimize the credit structure. The interest rates of personal mortgage loans and medium and long-term loans of enterprises refer to the LPR pricing of more than 5 years. Today’s LPR reduction is intended to drive the volume of housing loans, realize real estate easing and help steady growth; At the same time, it will also stimulate the medium and long-term loan demand of enterprises, improve the credit structure and improve the medium and long-term growth toughness of China’s economy. Therefore, under the background that the central bank weighed the balance of payments and price stability and did not cut the policy interest rate in May, the LPR reduction can be regarded as an “direct entity” interest rate reduction operation. After the LPR quotation was lowered today, the exchange rate rose within the day, which has little impact on the balance of payments.
We believe that the current monetary policy still takes stable growth and employment as the primary goal, maintains a stable and slightly loose policy tone, and the core is still to broaden credit. We believe that if the effect of short-term credit easing is not effective, the central bank may continue to guide the downward trend of LPR over 5 years. It is expected that there is still 15bp downward space for LPR over 5 years in the future. This is the process of leveling the steep pricing curve of loan benchmark interest rate since August 2019 in different real estate regulatory environments, and it is the process of returning the term interest margin of 1-year and 5-year LPR.
For the market performance, we suggest that there is an opportunity for the stock market to rebound to reverse: the biggest expectation difference is the improvement of personnel mobility brought by normalized nucleic acid detection, focusing on the related consumption industry chains such as aviation, airport, tourism, hotel and catering. In addition, continuing to look at multi stable growth chains, such as finance, real estate, construction and building materials, also suggests that growth stocks stabilize and rise after the US bond yield peaked. In terms of fixed income, it is expected that the yield of 10-year Treasury bonds will fluctuate widely in the range of 2.7% – 3% and reach a high of 3% in the third quarter.
The reduction of LPR is in line with our expectations, but it has not been adjusted in one year and the reduction range over five years is higher than expected
On May 16, we interpreted the report of MLF’s sequel, the reduction of LPR quotation probability on May 20, which clearly indicated the decline of LPR quotation probability this month. The core logic is that on May 9, the central bank put forward the transmission mechanism of “market interest rate + central bank guidance → LPR → loan interest rate” in the first quarter goods administration report of 2022. This mechanism means that the market interest rate plays an important forward-looking leading and influencing role in the formation of LPR quotation. Since the beginning of April, dr007 has continued to operate at a low level and the center has moved down significantly. We believe that under the above transmission mechanism, the sharp decline of market interest rate will have a significant traction on LPR, and the “central bank guidance” does not only mean “interest rate reduction” and “reserve requirement reduction” may also be included. The central bank’s reserve requirement reduction of 0.25 percentage point in April also has a guiding effect on LPR quotation. Although the central bank did not reduce the policy interest rate, the LPR quotation on the 20th is also likely to decline, The current view has been fulfilled.
In addition, since April, the reduction of fixed deposit interest rates by many banks has also transmitted to the asset side, affecting the LPR quotation. On April 15, the financial Associated Press reported that recently, the self-discipline mechanism of market interest rate pricing held a meeting to encourage the floating upper limit of deposit interest rate of small and medium-sized banks to be lowered by about 10bp. In addition to small and medium-sized banks, we also observed that the interest rates of 2-year and 3-year time deposits and large certificates of deposit of many large state-owned banks were lowered by 10 basis points. From the perspective of the period of deposit interest rate adjustment, the impact on LPR over 5 years from the asset side is greater, which explains the asymmetric interest rate reduction. In addition, we believe that this interest rate cut for varieties with a period of more than 5 years is also a correction to a certain extent since the reform of LPR mechanism in August 2019 due to the strict regulation of real estate and the past adjustment range of 5 years is continuously lower than that of 1-year period. In August 2019, the quotation of LPR with a period of 1 year and more than 5 years was 4.25% and 4.85% respectively, and the quotation in April this year was 3.7% and 4.6% respectively, with a decline range of 55bp and 25bp respectively; In line with the recent relaxation of the real estate demand side policy, the asymmetric reduction in May is also in line with the policy intention. After the adjustment in May, the quotation in one year and five years is reduced by 55 and 40bp respectively compared with August 2019, and the deviation is narrowed.
The core purpose of LPR reduction over 5 years is to broaden credit and optimize credit structure
The interest rates of personal mortgage loans and medium and long-term corporate loans refer to the pricing of LPR with a term of more than 5 years. We believe that the core reason for reducing LPR with a large range is to broaden credit and optimize credit structure. As of the end of March this year, China’s RMB personal housing loan balance was 38.8 trillion yuan, and the medium and long-term loan balance of enterprises was 78.5 trillion yuan, totaling 117.3 trillion yuan, accounting for 58.4% of the RMB loan balance. Reducing the LPR over five years will help drive the new credit demand of the two countries: 1. Cooperate with a number of recent real estate relaxation policies to promote the volume of mortgage loans, which also verified our judgment on the further relaxation of real estate demand side policies in the early stage. In April, China’s residential housing loans decreased by 60.5 billion yuan, a year-on-year decrease of 402.2 billion yuan, and the data fell sharply. On May 15, the central bank and the China Banking and Insurance Regulatory Commission jointly issued a document to reduce the lower limit of the first mortgage interest rate by 20bp. Today, the LPR over five years is reduced, which is intended to guide the reduction of mortgage interest rate, drive the gradual volume of mortgage, realize the easing of real estate policy and help steady growth. 2. Stimulate the demand for medium and long-term loans of enterprises. Repeated epidemics have affected corporate profits, expectations of economic trends and capital expenditure sentiment. Reducing financing costs will help improve corporate financing needs.
In addition, stimulating the incremental release of mortgage loans and medium – and long-term corporate loans will also help to improve the credit structure, not only improve the sustainability and health of China’s medium – and long-term economic growth, but also help to improve the bank’s asset-side profit structure and improve the profit level through the way of “volume plus price”, so as to form a strong support for the subsequent replenishment of capital and stable credit supply. Although a number of recent policies mean that the mortgage loan interest rate may fall, it is still a high-quality investment for banks. Not only the interest rate level is still relatively high, but also the credit qualification of the loan subject is high and the non-performing loan rate is low.
The central bank’s failure to cut the policy interest rate is a trade-off between the balance of payments and stabilizing prices. LPR cuts interest rates directly to the entity
The central bank did not cut the policy interest rates such as reverse repurchase and MLF in May, which we believe is a trade-off between the balance of payments and stabilizing prices. In the first quarter monetary policy implementation report released by the central bank on May 9, the expression of monetary policy was adjusted to “pay close attention to the monetary policy adjustment of major developed economies and give consideration to internal and external balance” on the basis of “focusing on me”, reflecting the consideration of internal and external balance in monetary policy. We have continued to suggest that the second quarter entered an important observation window period for the balance of payments. As of the end of April, China’s official foreign exchange reserves had reached US $3.12 trillion, a month on month decrease of US $68.27 billion, which was greatly impacted by the depreciation of non US currencies and the upward valuation factors of treasury bond yields of major economies. According to experience, the warning line of foreign reserves is $3 trillion. Once it approaches the warning line or disturbs monetary policy. At present, the interest rate difference between China and the United States continues to hang upside down, and the US dollar index and the Treasury bond yield of overseas economies have not yet reached the top. In the future, we still need to continue to pay attention to the balance of payments.
For price stability, the central bank has recently raised its attention to prices, and the third quarter is an important observation period.
On April 21, President Yi Gang said at the meeting of the international monetary and financial committee that “the primary goal of China’s monetary policy is to stabilize prices and employment”. The monetary policy implementation report for the first quarter of 2022 released on May 9 also made it clear that the monetary policy “supports stable growth, employment and prices” and “pays close attention to the changes of price trends”, reflecting that the central bank has paid more attention to prices. In April, CPI grew by 2.1% year-on-year. We expect that CPI may rise sharply in September, there is a risk of exceeding the target value, and the central bank will gradually pay more attention to prices.
After today’s LPR quotation was lowered, the exchange rate rose within the day. We believe that the decline of LPR directly points to the entity, will not aggravate the pressure of internal and external imbalances of monetary policy, and has little impact on the balance of payments.
The core of the follow-up policy of the central bank is still broadening credit
Credit and social finance data fell sharply in April, The central bank raised in April’s financial data answer to reporters’ questions “We will give better play to the dual functions of monetary policy tools in terms of aggregate and structure, accelerate the implementation of policies and measures that have been introduced, and actively plan incremental policy tools to support economic operation within a reasonable range. First, we will stabilize the total amount of credit. We will comprehensively use a variety of monetary policy tools to maintain reasonable and sufficient liquidity and enhance the stability of total credit growth. Second, we will reduce financing costs. Third, we will strengthen support for key areas and weak links.” 。 We believe that the current monetary policy still takes stable growth and employment as the primary goal, maintains a stable and slightly loose policy tone, and the core is still to broaden credit. In April, the central bank announced the reduction of reserve requirements, the addition of a number of refinancing tools, the promotion of banks to reduce the cost of liabilities such as deposit interest rates, the reduction of the lower limit of the first mortgage interest rate and the reduction of LPR quotation. At the same time, the central bank also actively promoted the easing of the three constraints of liquidity, capital and interest rate of bank credit supply, and guided the increase of credit supply. Follow up attention will be paid to the incremental loan policy of the service industry and the release of the credit easing effect.
We believe that if the effect of short-term credit easing is not effective, the central bank may continue to guide the downward trend of LPR over 5 years. It is expected that there is still 15bp downward space for LPR over 5 years in the future. This is the leveling of the steep benchmark interest rate pricing curve of loans since August 2019 in different real estate regulation environments. It is the process of the regression of the term interest margin of 1-year and 5-year LPR. The interest margin between the two is 60BP in August 2019 and 75bp as of May this year.
It suggests that there is an opportunity for the stock market to rebound to reverse. The biggest expectation is that the flow of personnel drives the consumption industry chain
In terms of equity market, we suggest that there is an opportunity for the stock market to rebound to reverse. The biggest expectation difference is the improvement of personnel mobility brought by normalized nucleic acid testing, focusing on the related consumption industry chains such as aviation, airport, tourism, hotel and catering. In addition, continuing to look at the multi stable growth chain, such as finance, real estate, construction and building materials, also suggests paying attention to the stabilization and upward growth stocks after the US bond yield peaked. In terms of fixed income market, it is expected that the yield of 10-year Treasury bonds will fluctuate widely in the range of 2.7% – 3%, reaching a high of 3% in the third quarter, and the yield curve will return to steepening.
Risk tip: Overseas central banks have started the tightening process, and the interest rate spread between China and the United States is upside down. The second quarter is an important observation period of balance of payments. Once it approaches the warning line, it may disturb China’s monetary policy.
