The LPR fell for the second time this year, and banks in many places announced interest rate cuts, what impact will it have on the stock market?

Guo Shiliang

2024-07-25 07:25Published in Qinghai financial commentator, financial columnist

The LPR fell for the second time this year, with the 7-day reverse repo rate, the 1-year and 5-year LPRs all cut by 10 basis points.

The second decline in the LPR this year is conducive to guiding the reduction of financing costs and the reduction of mortgage interest rates. To a certain extent, it can play a role in promoting corporate financing and boosting the demand for housing that just needs to be purchased.

In the context of the decline in the LPR, some banks have begun to announce interest rate cuts, especially small and medium-sized banks have successively issued announcements on the reduction of deposit interest rates.

In fact, the pressure on banks to collect deposits is still relatively high, especially for small and medium-sized banks. For small and medium-sized banks, the only way to attract depositors is to raise deposit rates or improve service quality.

As the pressure on banks' net interest margins continues to increase, small and medium-sized banks cannot maintain a high deposit interest rate level for a long time, so this time the interest rate cut of small and medium-sized banks is also known as the compensatory reduction behavior. If the LPR continues to decline in the future and the pressure on banks' net interest margins continues to intensify, then it cannot be ruled out that there will be room for further interest rate cuts in the future.

In the first quarter of this year, the net interest margin of commercial banks was only 1.54%, compared with 1.69% in the fourth quarter of last year. Under the influence of extremely low net interest margins, the operating pressure of commercial banks has also continued to increase.

With the second decline in the LPR this year, it is not ruled out that large state-owned banks and joint-stock banks will further reduce deposit interest rates in the future. If the big banks continue to cut interest rates, then the pressure will be put on small and medium-sized banks, and the possibility of small and medium-sized banks following the interest rate cuts will continue to increase.

Small and medium-sized banks are expected to cut deposit interest rates, and large banks are expected to lower their deposit interest rates.

Judging from the situation in the European and American markets, the risk-free interest rate in the European and American markets has been very low for a long time, but after the Federal Reserve raised interest rates sharply in the past two years, the risk-free interest rate of the entire market has increased rapidly. Against the backdrop of a prolonged low risk-free rate, some of the deposit funds will flow to the equity market.

Over the years, the domestic risk-free interest rate has continued to fall, but why has it not been able to promote the rise of the A-share market?

Compared with overseas mature markets, the A-share market will also be affected by the level of interest rates, but it will also be affected by policy factors. At the same time, the A-share market has been more oriented towards financing functions for many years, and the stock market has become less affected by the interest rate environment.

In 2007, there were 1,400 listed companies in the A-share market. However, by 2024, the number of listed companies in the A-share market will be as high as 5,364, but the market index will still be 3,000 points. In the past 17 years, the stock market capacity has increased a lot, and the total market value has also increased a lot, but the stock market has not risen.

After 2021, the risk-free interest rate in the domestic market continued to fall, and the bank deposit interest rate also continued to fall, but it did not promote the flow of funds to the stock market and real estate market. For these funds, in the context of a more complex investment environment, they may be more inclined to prudent and conservative investment varieties, but the willingness to pursue high returns has decreased significantly. For example, savings bonds, certificates of deposit, and ultra-long-term special government bonds have become channels for attracting large amounts of capital to invest.

The risk-free rate continues to fall, banks continue to cut interest rates, and stock market valuations are at historically low levels, but these conditions have not been the reason for the rise of A-shares. In the final analysis, it is still the lack of confidence in the market, and investors have not been able to obtain a reasonable return on investment for a long time by investing in A-shares, but have become a place for large consumption. For investors, in the context that the A-share investment ecology has not been substantially improved, they would rather invest in investment varieties with lower returns and higher security than invest in A-shares.

Therefore, the A-share market is not short of funds, but confidence. Once the market rises, it is also necessary to continue to boost the confidence of the market and not set a limit on the market index points of A-shares.

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Personal opinion, for reference only