(The author of this article is Li Chao, chief economist of Zheshang Securities)
On July 25, 2024, the central bank increased the issuance of 200 billion MLF, and the interest rate fell by 20BP, which is higher than the 10BP of the 7-day reverse repo rate. We believe that on the one hand, the volume is to maintain the stability of short-term funds, and on the other hand, it is affected by the pressure on the active liabilities of interbank certificates of deposit. The larger reduction in interest rates is to take into account the pressure on banks' net interest margins and narrow the interest rate spreads with interbank certificates of deposit, which will generally help ensure the sustainability of bank profits for capital replenishment, and the sustainability of subsequent bank support for the real economy. From the perspective of policy framework, the monthly MLF operation time may be moved to the 25th of each month, that is, after the LPR quotation, the importance of MLF will be weakened, and the 7-day reverse repo rate will be used as the policy rate, and the mechanism of other interest rates being transmitted from short to long term will be gradually straightened out, suggesting that we should pay attention to the liquidity situation in the middle of the month.
>> central bank's MLF operation is intended to stabilize the capital side and ease the pressure on banks' net interest margins
On July 25, 2024, the People's Bank of China announced that it had carried out a reverse repurchase operation of 235.1 billion yuan at a fixed interest rate and quantity bidding on the same day, with an interest rate of 1.7%. The medium-term lending facility (MLF) operation of 200 billion yuan was carried out in the form of interest rate bidding, with an interest rate of 2.3%, compared with 2.5% previously, and the interest rate was reduced by 20BP.
1. The increase in the amount of MLF at the current point in time is due to the central bank's maintenance of funds on the one hand, and the pressure on the active liabilities of interbank certificates of deposit on the other hand.
First, maintain the stability of funds. The MLF operation is carried out on the 15th of each month (postponed accordingly on holidays), and this time we choose to add an operation on July 25, or consider actively maintaining short-term capital stability. On July 23 and 24, near the end of the month, the capital side tightened slightly, DR007 and DR001 were both above 1.7% (7-day reverse repo policy rate), considering that the volume of government bond issuance in the two weeks at the end of the month is also relatively large, and the subsequent central bank's potential bond selling operations will disturb liquidity, banks may have the need to bid for MLF, and the central bank will release funds to maintain appropriate stability and provide medium and long-term financial support for institutions.
Second, it is affected by the pressure on the active liabilities of interbank certificates of deposit. Since the beginning of this year, the general deposits of banks have been diverted to bank wealth management, money market funds, and bond funds, on the one hand, this has increased the pressure on bank liabilities, and there is a demand for additional issuance of interbank certificates of deposit, and the issuance quota of many interbank certificates of deposit in 2024 will continue to increase on the basis of the higher level in 2023. From January to May this year, the issuance of interbank certificates of deposit in the whole market was 13.4 trillion yuan, an increase of 3.02 trillion yuan year-on-year, and the total custody balance of interbank certificates of deposit was 17.1 trillion yuan as of the end of May, an increase of 2.7 trillion yuan over the same period last year. However, the issuance of a large number of deposits will be subject to two restrictions, on the one hand, the issuance quota of banks at the beginning of the year, and on the other hand, the proportion of interbank liabilities in the total liabilities shall not exceed 1/3, and the latter may be relatively more stressful. As a result, the interest rates on several treasury cash deposits since the beginning of this year are generally higher than the interest rate limit in the same period last year, and we believe that this factor may have driven the demand for MLF from banks.
2. The MLF interest rate fell by 20BP, which is more than the 10BP reduction in the 7-day reverse repo and SLF interest rate, and we believe that one of the reasons is to take into account the pressure on banks' net interest margins. Compared with 7-day reverse repo and SLF, MLF term is 1 year, as an intermediate link in the policy rate from short and long transmission, it can provide medium-term financial support for banks, we believe that the interest rate decline is greater mainly to take into account the cost of bank debt, net interest margin pressure, which also matches the extent of today's six major banks to reduce the deposit interest rate, according to today's Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, China Construction Bank, Bank of Communications, Postal Savings Bank of China six major banks cut deposit interest rates, although several banks have a slight difference, However, most of the operations are to reduce the interest rate of 1 year and below by 10BP, and reduce the interest rate by 20BP for two years, three years and five years. Since the beginning of this year, RRR cuts, prohibitions on manual interest rate supplements, and policy rate cuts have all been used to suspend the decline of banks' net interest margins, so as to ensure the sustainability of bank profits for capital replenishment, and the sustainability of banks' subsequent support for the real economy.
The second reason is the narrowing of the spread between MLF and interbank certificates of deposit. MLF and interbank certificates of deposit are the sources of liabilities of banks, and there is a mapping relationship between interest rates. As of July 23 this year, the maturity yield of one-year state-owned and joint-stock bank interbank certificates of deposit was 1.92% and 1.94% respectively, and the MLF interest rate range is larger and will also narrow the interest rate difference between it and interbank certificates of deposit.
>> strengthen the policy interest rate attribute of the 7-day reverse repo rate and dilute the importance of the MLF rate
On June 19 this year, President Pan Gongsheng's speech at the Lujiazui Forum "China's current monetary policy stance and the evolution of the future monetary policy framework" proposed that "in the future, we can consider a short-term operating interest rate of the central bank as the main policy interest rate, and at present, the 7-day reverse repo operation rate has basically assumed this function." The interest rates of other maturities monetary policy instruments can dilute the color of the policy rate and gradually straighten out the transmission relationship from short to long".
The policy gradually strengthens the policy interest rate attribute of the 7-day reverse repo rate, and the LPR quotation on July 22 is adjusted with the 7-day reverse repo rate instead of MLF, and the MLF operation on July 25 may mean that the monthly MLF operation time will be moved to the 25th of each month with a high probability in the future, that is, after the LPR quotation, which shows that the 7-day reverse repo rate is used as the policy rate, and the short-term and long-term interest rate transmission relationship is gradually straightening out. Although the importance of the MLF rate will gradually diminish in the future, it will still play an important role as a medium-term interest rate guide for the policy rate curve.
>> pay attention to the liquidity situation in the following months
If the monthly MLF operation time is moved to the 25th of each month, the existing MLF will still expire around the 15th of the middle of the month, superimposed on factors such as tax payment and payment in the middle of the month, the market liquidity situation is worth paying attention to, and it is expected that the central bank will actively guide the capital side through reverse repo, temporary reverse repo and other liquidity delivery tools.
>> Treasury yields are expected to remain volatile
The central bank is still from the perspective of financial stability, which is intended to guide the shape of the treasury yield curve, if the treasury yield curve is too flattened, once there is a change in fundamental expectations, a sharp rise in interest rates is likely to trigger liquidity risks in the market and institutions. On July 22, the central bank announced that "medium-term lending facility (MLF) participating institutions that have the need to sell medium and long-term bonds can apply for a phased reduction of MLF collateral" is intended to encourage institutions to release long-term bonds, with the current MLF balance exceeding 7 trillion yuan, and most of them are pledged by national bonds and local bonds. Overall, therefore, we maintain the judgment that the yield of government bonds will be in a state of volatility in the future, and the central bank may borrow and sell government bonds if necessary to correct market expectations in a timely manner.
>> risk warning
The RMB exchange rate and balance of payments are under pressure, which puts forward more demands on monetary policy and makes it more difficult.
(This article is the author's personal opinion only)