Monetary policy, liquidity
On July 22, the People's Bank of China (PBoC) announced that the 7-day reverse repo rate, 1-year LPR and 5-year LPR were all cut by 10bp to 1.70%, 3.35% and 3.85% respectively. In our report released on July 5, we pointed out that there is room for LPR quotations to be reduced by 10bp-20bp. It is hereby revisited for the benefit of readers.
Monetary Policy and Liquidity Outlook: In a speech by the People's Bank of China (PBoC) on June 19, it pointed out that "it is important to improve the quality of LPR quotations to more truly reflect the level of interest rates in the loan market". At the same time, on July 1, the central bank announced that it would carry out treasury bond borrowing operations. So, how much room is there to optimize LPR offers? How do you view the follow-up monetary policy operation?
The proportion of deductive loans in LPR quotations has reached about 40%, indicating that LPR quotations can no longer represent the loan interest rates of the best quality customers, and there is room for optimization. Based on the weighted average interest rate of general loans and the proportion of various types of loans in March 2024, the average interest rate of the reduced point loan is about 3.27%, which is about 18bp lower than the 1-year LPR. From this point of view, optimizing the LPR quotation can roughly push the LPR down by about 10-20bp.
From the perspective of changes in the cost of debt, there is a certain rationality in the current LPR quotation reduction, and from the perspective of stabilizing interest margins, it can be matched by continuing to reduce the deposit rate. In the first half of 2024, the inversion of NCD interest rate and MLF interest rate deepened, and the cost of interbank debt fell to a certain extent. At the same time, standardizing the "manual interest supplement" is conducive to the downward trend of deposit costs.
In the third quarter, against the backdrop of external factors still restricting monetary policy, the PBOC launched a treasury bond trading tool on the one hand to maintain the stability of the interest rate of key maturity treasury bonds; On the other hand, from the perspective of internal equilibrium, monetary policy adheres to a supportive stance, and as the impact of "manual interest calls" on deposits subsides, optimizing LPR quotes may become an option.
June liquidity review: at the end of the half year, the short-end capital margin tightened, and the DR007 pivot went up; The net financing scale of NCD has fallen, and the NCD issuance rate has fallen below 2%. DR007 fell back to around 1.80% at the beginning of June and rose to around 2.10% at the end of the month. The impact of the regulation of "manual interest supplement" on the liability side of banks has decreased, the net financing scale of NCD has decreased, and the issuance interest rate has continued to decline.
Liquidity outlook for July: It is expected that the liquidity margin will loosen after half a year, and the net financing scale of government bonds in July will be about 1 trillion yuan. As the impact of the "manual interest rate supplement" subsides, liquidity is expected to loosen marginally after the half-year point in time. It is estimated that the net financing scale of government bonds in July will be about 1 trillion yuan. It is estimated that the scale of net revenue in July will be about 100 billion yuan, and July 15 is the deadline for tax payment.
On June 19, Pan Gongsheng, Governor of the People's Bank of China, delivered a speech at the Financial Street Forum, introducing the mainland's current monetary policy stance and the evolution of the future monetary policy framework. On the afternoon of July 1, the People's Bank of China announced that it had decided to carry out treasury bond borrowing operations for some primary dealers in the open market in the near future. Overall, the key adjustments to the recent monetary policy framework include clarifying the main policy rate, optimizing LPR quotations, and introducing the trading of government bonds.
In our previous report, "Rate Cut or RRR Cut? pointed out that the adjustment of the open market operation interest rate is constrained by exchange rate factors, and the adjustment of LPR and deposit interest rates may be more flexible. So, how much room is there to optimize LPR offers?
1. How much room is there to optimize LPR quotations?
In a speech on June 19, the People's Bank of China (PBoC) pointed out that "we will continue to reform and improve the loan prime rate (LPR), and focus on improving the quality of LPR quotations to more truly reflect the level of interest rates in the loan market in response to the problem that some prime interest rates deviate significantly from the actual best customer interest rates".
The proportion of deductive loans in LPR quotations has reached about 40%, indicating that LPR quotations can no longer represent the loan interest rates of the best quality customers, and there is room for optimization. In March 2024, among general loans, the proportion of loans with interest rates lower than the LPR, equal to the LPR, and higher than the LPR was 40.44%, 6.74%, and 52.81%, respectively. From the definition of LPR, LPR is the interest rate of the bank's best customer loans, and the current proportion of loans with a reduction point on the basis of LPR is as high as 40%, indicating that the LPR quotation does not fully reflect the optimal price of bank loans.
So, how much room is there for optimization in LPR quotations? In March 2024, the weighted average interest rate of general loans was 4.27%, which is about 3.27% based on the proportion of loans priced below the LPR, equal to LPR loans, above the LPR and the weighted average interest rate of general loans, which is about 18bp lower than the one-year LPR. By optimizing the quality of LPR quotations, it is possible to drive the LPR down by 10-20bp.
Judging from the current LPR quotation mechanism, LPR is based on MLF plus points, so most of the LPR downward adjustments follow the MLF downward adjustment, and this relationship may be weakened in the future. After the LPR quotation reform in 2019, most of the LPR reductions were made in line with the MLF interest rate adjustment. If the central bank weakens the policy color of MLF interest rates in the future, the pace of adjustment of LPR and MLF interest rates may be relatively independent. In fact, since 2024, the LPR adjustment has shown signs of weakening its relationship with the MLF. In February 2024, the 5-year LPR was cut by 25bp, and before that, the MLF rate was not lowered, and the LPR cut mainly reflected the effect of the deposit rate cut in December 2023.
From the perspective of changes in the cost of debt, there is a certain rationality in the current LPR quotation reduction, which can be matched by continuing to reduce the deposit rate. The extent of the LPR quotation on the basis of the MLF interest rate mainly depends on the bank's own cost of funds, market supply and demand, risk premium and other factors. Since 2024, both interbank liabilities and general deposit costs have declined to a certain extent. Since the beginning of 2024, the inversion of the 1-year NCD rate and the MLF rate has deepened; For the whole year of 2023, the pivot of the NCD interest rate of the 1-year joint-stock bank will be about 2.50%, and in the first half of 2024, the pivot of the NCD interest rate of the 1-year joint-stock bank will fall to about 2.20%, a decrease of about 30bp from 2023. The decline in the NCD rate means that the cost of interbank liabilities of commercial banks has fallen; At the same time, taking into account the impact of the "manual interest supplement" of standardized deposits, the cost of bank deposits has also fallen to a certain extent. However, in order to stabilize interest rate spreads, it is still necessary to further reduce the deposit rate while optimizing LPR quotations.
2. June liquidity review and July liquidity outlook
2.1 June liquidity review
At the end of the half year, the short-end capital margin tightened, and the DR007 pivot went up; The net financing scale of NCD has fallen, and the NCD issuance rate has fallen below 2%. DR007 fell back to around 1.80% at the beginning of June, and rose to around 2.10% at the end of the month. The impact of standardizing "manual interest supplement" on the liability side of banks has decreased, and the net financing scale of NCD has dropped from more than 700 billion yuan in May to about 270 billion yuan in June, and the NCD interest rate has continued to decline, falling to below 2% at the end of June. After the acceleration of local government new special bonds in mid-to-late May, the issuance of local bonds in June was still slow, and the scale of government bond issuance in June increased to 1.2 trillion yuan, which may be considered to be in harmony with the rhythm of local bonds, and the net financing of government bonds in June was only 700 billion yuan. Credit demand remained weak in June, the central point of bill interest rates continued to decline, and bill interest rates rebounded slightly at the end of the half year.
2.2 July liquidity outlook
It is expected that the liquidity margin will loosen after half a year, and the net financing scale of government bonds in July will be about 1 trillion yuan. As the impact of the "manual interest rate supplement" subsides, liquidity is expected to loosen marginally after the half-year point in time. In July, the issuance of key maturity treasury bonds shrank, and it is expected that the issuance of treasury bonds in July will be about 1 trillion yuan, and if the issuance of local bonds is appropriately accelerated, and the issuance of new local bonds will reach about 500 billion yuan, the net financing scale of government bonds will be about 1 trillion yuan. July is a big month for tax payment, however, considering the slowdown in the growth rate of fiscal revenue this year, it is expected that the scale of net fiscal revenue in July will be small for liquidity, and the scale of broad fiscal net revenue in July is expected to be about 100 billion yuan; The deadline for tax payment is July 15, and we should pay attention to the disturbance of the tax period on the capital side.
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