Event: on May 20, 2022, the central bank announced that the quoted interest rate (LPR) of one-year loan market remained unchanged at 3.7%; The LPR over 5 years was reduced by 15 basis points to 4.45%.
Did the LPR interest rate cut exceed expectations? Why 15bp? What is the reason for the interest rate cut? This LPR interest rate cut of 15bp is the largest interest rate cut after the adoption of LPR plus point pricing mode, exceeding market expectations. In terms of reasons:
1) under the loose monetary policy environment, banks have room to reduce LPR. Since the middle of last year, various monetary policy tools have reduced the debt cost of banks by about 23bp. For the five-year LPR, 5bp has been reduced in January, and 15bp is more appropriate for this interest rate reduction. Since the second half of last year, the central bank has reduced the cost of bank liabilities by reducing the reserve requirement, increasing the amount of small refinancing, two dual carbon tools and optimizing the upper limit of deposit self-discipline. Since this year, the central bank has continued to reduce the cost of bank liabilities by comprehensively reducing interest rates in January, reducing reserve requirements in April, scientific and technological innovation, inclusive pension and clean coal refinancing. Among them, the most important is that in April, the central bank guided the interest rate self-discipline mechanism and established a market-oriented adjustment mechanism of deposit interest rate, so that the weighted average interest rate of new deposits in national financial institutions in the last week of April was 2.37%, down 10 basis points from the previous week, freeing room for the reduction of loan interest rate. This is also what we emphasized in the report “eight concerns of the central bank’s monetary policy report in the first quarter” that “the loan interest rate may be reduced by reducing the deposit interest rate, and the LPR may still be reduced, so as to promote the reduction of comprehensive financing costs of enterprises”.
In order to more intuitively reflect the pressure drop of various monetary policy tools on the cost of bank liabilities, we continue the report calculation: is there room for LPR to cut interest rates again Using the data of 46 listed banks, the algorithm obtains the impact of various monetary policy tools on the bank’s debt end cost since the middle of 2021, especially the MLF interest rate reduction in January (debt cost reduction of 3bp), the reserve requirement reduction in April (reduction of 0.4bp), the establishment of scientific and technological innovation, inclusive pension refinancing, and the expansion of coal clean refinancing (reduction of 0.2bp) The impact of the market-oriented adjustment mechanism of deposit interest rate in April (down 10bp) on the cost of bank liabilities. Overall, since the middle of last year, various policies and measures have saved about 350 billion yuan of bank capital costs, corresponding to a reduction of about 23bp of bank debt costs. In December 2021 and January 2022, the one-year LPR was reduced by 15bp in total, and the five-year LPR was only reduced by 5bp in total in the same period, which means that the five-year LPR has “insufficient interest rate reduction”. Therefore, there is also an element of supplementary reduction in this “interest rate reduction”, and the range of 15bp is more appropriate. At the same time, it means that although the interest rate difference between LPR and MLF narrowed after the LPR adjustment, the negative impact on banks is limited due to the foreshadowing of policies such as reducing deposit interest rate and reserve requirement reduction in the early stage.
2) release the signals of maintaining economic stability and real estate stability. LPR with a term of more than 5 years is linked to the mortgage interest rate. At present, the real estate boom is poor, and the demand for overweight of stable real estate policy is strong. In April, the cumulative source of funds for real estate development was – 23.6% year-on-year, and the decline in the opening and completion of land acquisition sales further expanded. The cumulative investment in real estate development was – 2.7% year-on-year, down 2.0 percentage points from the previous value. The investment in real estate development was – 10% year-on-year, down 7.7 percentage points from the previous value. It is pointed out that the relief effect of capital pressure on the financing end of real estate enterprises is still not obvious, and the real estate boom is still poor, so policies need to be relaxed to stimulate demand.
3) reduce the comprehensive financing cost of entities, stabilize the contraction of financing demand, and improve the medium and long-term financing willingness of infrastructure, manufacturing and real estate. In addition to affecting mortgage loans, 5-year LPR is also closely related to medium and long-term loans of enterprises related to fixed asset investment such as infrastructure, manufacturing and real estate. In April, the financial and economic data went down comprehensively, the medium and long-term loans of enterprises increased significantly, and the three major sub items of fixed asset investment weakened to varying degrees. Based on the production method and regional method, we calculate that under the disturbance of the epidemic, Q2 GDP may drop to [2.1%, 3.4%], and the pressure on the target of 5.5% economic growth will increase during the year, which requires further efforts from the investment side. It is estimated that the average proportion of loans related to housing, infrastructure and manufacturing of the five state-owned banks in the three years from 2019 to 2021 is 36.7% (personal housing loans and real estate loans), 19.5% (power, gas and water production and supply industry, construction industry, transportation, warehousing and postal industry) and 9.9% (manufacturing industry) respectively. The five-year LPR reduction is conducive to reducing the medium and long-term loan costs of infrastructure and manufacturing, releasing the firm determination to maintain economic stability, improving market pessimistic expectations and guiding the enterprise sector to expand financing demand.
What is the impact of this LPR interest rate cut?
1) it is conducive to boosting the demand for commercial housing and promoting the healthy and stable operation of the real estate market. In April, the cumulative sales area of commercial housing fell by 7.1 percentage points to 20.9% compared with the previous value. The overall house price data of 70 cities continued to decline. The price of new houses increased by – 0.1% year-on-year in April and the price of second-hand houses increased by – 1.6% year-on-year. At the same time, the medium and long-term loans of household departments increased negatively again in April, pointing to the great impact of the epidemic on real estate sales and the fact that the loose policies in many places have not effectively released the demand for house purchase. Taking the subway passenger volume as the measurement index of residents’ living and consumption radius, the index is about 3 weeks ahead of the commercial housing transaction area of 30 cities. The passenger volume of 10 key cities this week was 26.018 million, down – 41.8% from the high in early March. There is a significant decline in Beijing, Nanjing, Zhengzhou and Guangzhou. At present, the subway passenger volume index has been marginally stabilized. It is expected that the impact of epidemic prevention and control on real estate sales will continue until June. The 5-year LPR reduction comes at the right time, and the mortgage interest rate in some hot spots is also expected to be reduced, boosting the demand for commercial housing.
2) the combination of comprehensive “interest rate reduction” and structural easing. Theoretically, the maximum reduction range of the first mortgage interest rate may be up to 35bp, further opening up the space for “implementing policies according to the city”. On May 15, the central bank and the China Banking and Insurance Regulatory Commission adjusted the lower limit of the first house loan interest rate to no less than the market quoted interest rate (LPR) of the corresponding term loan by 20 basis points. As of May 18, Tianjin, Zhengzhou, Jinan, Suzhou, Yibin, Wuxi and other places have adjusted the loan interest rate of the first house underground. Superimposed on the five-year LPR reduction, the subsequent independent reduction of housing loan interest rate not only has more room in the range, that is, in theory, the maximum reduction of the first housing loan interest rate may reach 35bp, but also has more cities in the region.
3) it should be noted that the real boost of “interest rate cut” to real estate sales still depends on the willingness and ability of residents to increase leverage. It is restricted in the short term and will increase slightly and steadily in the medium and long term. In the short term, the epidemic has caused a structural impact on Residents’ income, including an increase in the decline in the growth rate of property income, and the income recovery of middle-income groups is better than that of low-income groups. The widening income gap will restrict the ability and willingness of low-income groups to increase leverage (see the report “structure, risks and deviations behind the dark moment of credit” for details). In the medium and long term, residents will increase leverage slightly and steadily. On the one hand, there is still room to increase leverage: after excluding operating loans, the leverage ratio of Q1 residents in China in 2022 is 47.4%, which is still far from the warning line of 65%, which is also lower than 75.7% in developed countries and 65.1% in G20; On the other hand, leverage is also capable: China’s high savings and high down payment ratio provide a safety cushion for residents’ debt. At the same time, the proportion of disposable income of household sector in GDP has increased steadily, from an average of 56.0% during the Eleventh Five Year Plan period to 59.5% during the 13th Five Year Plan period, indicating that the leverage ability of household sector is stronger than that of other sectors.
See the report on how far the growth lever of residents will continue to increase by 5.5% in the long term, which is consistent with the stable growth of residents.
4) during the year, the interest expenditure of stock housing loans was reduced by about 7.2 billion yuan. In 2023, the interest expenditure of stock personal housing loans was reduced by about 42 billion yuan, which is conducive to the release of residents’ consumption demand in the long run. The central bank pointed out in the supplement to the monetary policy implementation report of orderly promoting the reform of quoted interest rate in the loan market that “by the end of August 2020, the conversion of stock loan pricing benchmark has been successfully completed. The cumulative conversion of stock personal housing loans was 28.3 trillion yuan and 64.297 million households, with a conversion ratio of 98.8%, and 94% of the converted stock personal housing loans refer to LPR pricing”. Considering that the repricing date of China’s floating mortgage interest rate is on January 1 of each year or the opposite month to day of the loan issuance date, it is roughly estimated that the scale of stock personal housing loans will reach 30 trillion yuan in 2022, 94% of which refer to LPR pricing. Assuming that 50% of them choose the opposite month to day of the loan issuance date as the repricing date, the five-year LPR will be reduced by 15bp, and the interest expenditure of such loans will be reduced by about 7.2 billion yuan from June to December this year, In 2023, the interest expense of stock personal housing loans decreased by about 42 billion yuan, which is conducive to promoting the recovery of social zero consumption and gradually returning to the pre epidemic level in the long run.
Asset allocation suggestions: good for real estate, the range may be limited; Prompt the logic of long-term recovery of consumption; Good bank.
Residents have more room to leverage, but restricted by the impact of the epidemic, the severe employment situation, the widening income gap and other factors, the probability of this round of real estate recovery is “slightly and steadily leveraging”. The interest rate cut is good for the real estate equity sector, but the degree may be limited. The follow-up real estate policies need to continue to work from the supply side; Under the general tone of “housing without speculation”, the long-term mechanism of real estate has been gradually improved. The central government encourages rigid demand and improved demand and inhibits speculative house purchase. Therefore, the reduction of house purchase expenditure caused by interest rate reduction may be transformed into consumption expenditure in the long run, alleviate the squeeze of real estate on consumption and further promote the final consumption rate. Given that the interest rate cut is based on the full reduction of debt costs by banks, which is to some extent the “supplementary reduction” of banks since January, this perspective has limited negative impact on banks. At the same time, interest rate cuts will help stabilize and improve the economy, help broaden credit, improve the quality of bank assets and benefit banks.
It is extremely difficult to achieve 5.5%, and the sustainability of subsequent steady growth will exceed expectations.
The central bank’s sharp reduction in the five-year LPR may only be the beginning. Maintaining the previous judgment, the credit economy is weak, great efforts need to be made to achieve 5.5%, and the steady growth policy still needs to be accelerated, and the sustainability will exceed expectations. Possible measures include: structural monetary policy, continue to reduce the real loan interest rate by reducing the deposit interest rate; The supply and demand side of real estate has been further loosened, and the “urban implementation strategy” has extended to high-energy cities; Special bonds are more advanced, tax reduction and fee reduction are done well, and special government bonds, the amount of special bonds issued in advance and the issuance of consumption bonds by all localities are optional incremental tools, which will further expand infrastructure, stabilize real estate, stabilize foreign trade and promote consumption.
Risk tips
The epidemic repeatedly exceeded expectations, and the implementation of monetary policy was less than expected.
