How the central bank's "combination punch" of interest rate cuts stirred the market

On July 22, 2024, the People's Bank of China (hereinafter referred to as the "central bank") launched a "combination punch" of interest rate control. Several key interest rate indicators such as Open Market Operations (OMO), Loan Prime Rate (LPR), Standing Lending Facility (SLF) and Medium-Term Lending Facility (MLF) have been mobilized.

On the same day, the central bank announced that the 7-day reverse repo operation in the open market would be adjusted to a fixed interest rate and quantity bidding. The central bank authorized the National Interbank Funding Center to announce that the loan market prime rate on July 22 was 3.35% for 1-year LPR and 3.85% for LPR over 5 years. Both the 1-year and 5-year LPRs fell by 10 basis points. At the same time, the central bank decided to appropriately reduce the collateral for MLF operations.

The timing and expression of this rate cut are relatively special.

From the perspective of time, the Zheshang Securities Research Report pointed out that in the past historical cycle, the policy rate avoided cutting interest rates in the month of the Politburo meeting, and the central bank announced the interest rate cut at 8 o'clock in the morning, and did not follow the open market operation announcement at 9:30, and the time point in the month and the day may essentially reflect the urgency of the interest rate cut.

In terms of content, the interest rate cut has changed the previous interest rate bidding method, and the policy interest rate target attribute of the 7-day reverse repo rate has been strengthened. Since the official launch of the new LPR quotation mechanism in August 2019, the MLF operating rate has been the pricing basis for LPR quotations. After the 7-day reverse repo rate and LPR interest rate were slightly lowered on the date of this rate cut, the MLF interest rate was postponed for 3 days before the cut.

Industry insiders believe that this special interest rate cut indicates that there may be an important shift in monetary policy in the future, which may have a new impact on the capital market.

Deposit rates fell again

Under the market-based adjustment mechanism of deposit interest rates, bank deposit rates are linked to the yield of 1-year LPR and 10-year treasury bonds.

On July 25, the Industrial and Commercial Bank of China, the Agricultural Bank of China, the Bank of China, the China Construction Bank, the Bank of Communications, and the Postal Savings Bank collectively "officially announced" a comprehensive reduction in deposit interest rates. Among them, the interest rate on demand deposits was lowered by 0.05 percentage points, the interest rate on notices, agreements and time deposits with a maturity of one year or less was reduced by 0.1 percentage points, and the interest rate on time deposits with a maturity of two years or more was reduced by 0.2 percentage points.

According to the announcement, the Industrial and Commercial Bank of China, the Agricultural Bank of China, the Bank of China, the Construction Bank of China, and the Bank of Communications lowered the interest rates on the lump sum deposit of 1-year, 2-year, 3-year, and 5-year time deposits to 1.35%, 1.45%, 1.75%, and 1.80%. The Postal Savings Bank lowered the interest rate of one-year time deposit to 1.38%, slightly higher than that of the other five major banks, and the interest rate of other maturities is the same as that of the five major banks.

Shen Juan, chief analyst of Huatai Securities Banking and Securities, said that from a structural point of view, the interest rate on medium and long-term deposits has fallen even more, which is conducive to alleviating the problem of long-term deposits and promoting structural optimization. According to historical experience, after the large state-owned banks start to reduce the listed interest rate, the small and medium-sized banks will gradually follow.

Ren Zeping, an economist and founder of Zeping Macro, believes that the timely adjustment of deposit pricing by banks based on the market-oriented adjustment mechanism of interest rates will help alleviate the pressure on net interest margins, stabilize the cost of bank liabilities, enhance the soundness of bank operations, and make room for further reducing the financing cost of the real economy. In addition, the reduction of deposit interest rates directly leads to a decrease in deposit income, of which the interest rate on fixed deposits has been lowered significantly, taking a 5-year deposit of 1 million yuan as an example, the reduction in interest rates directly leads to a decrease in interest income of about 10,000 yuan, which will reduce the saving tendency of enterprises and residents.

From the perspective of corporate funds, since April this year, the regulator requires banks not to promise or pay customers in any form to exceed the authorized upper limit of the deposit interest rate, that is, banks are prohibited from collecting deposits at high interest rates through "manual interest supplements", and corporate deposits have been "moved".

Soochow Securities Research Report pointed out that the new corporate deposits in May and June were significantly lower than the same period in history, and enterprises began to gradually transfer funds to higher-yield wealth management products, money market funds, bond funds, etc.

In terms of corporate financing, the research report of Guojin Securities said that the reduction of LPR may directly lead to the decline in the financing cost of new medium and long-term loans in infrastructure and manufacturing, which will also help alleviate the pressure on existing debt and stimulate demand. According to the LPR pricing framework, most of the existing loans will be adjusted according to the LPR within one year, thereby easing the debt repayment pressure of enterprises and urban investment platforms.

What is the impact of the bond market?

A number of brokerage research reports and analysts believe that the deposit transmission after the interest rate cut and the phased reduction of MLF collateral may be good for the bond market. Industrial Securities Research Report said that in the short term, for the bond market, the impact of "deposit moving" will continue, coupled with the steep curve, the probability of rapid overshoot in the bond market is not large, and it may still be a volatile bullish pattern.

From the perspective of market performance, Wind data shows that from July 22 to July 26, the main contract of 30-year treasury bond futures went all the way up. As of the close of trading on July 26, 30-year treasury bond futures (TL2409) closed at 110.42 yuan, an increase of 0.32%; The 10-year Treasury bond futures (T2409) closed at 105.925 yuan, up 0.09%.

The decline in the yield of ultra-long-term interest rate bonds has expanded. As of the close of trading on July 25, the yield on the 30-year Treasury (230023) fell by 2.50 basis points to 2.4250%. The yield on the 10-year Treasury (240004) fell 2.15 basis points to 2.2050%.

It is worth noting that the central bank announced on July 22 that in order to increase the scale of tradable bonds and ease the pressure on supply and demand in the bond market, from this month, MLF participating institutions that have the need to sell medium and long-term bonds can apply for a phased reduction of MLF collateral.

MLF collateral refers to high-quality bonds provided by commercial banks and policy banks as collateral in MLF operations. The release of these pledged bonds is conducive to increasing the scale of bonds available for trading in the market and alleviating the asset shortage.

Zheshang Securities Research Report pointed out that the policy of phased reduction and exemption of MLF collateral may have two purposes, one is to guide the expectation of long-term bond yields, and the other is to gradually dilute the color of MLF. Combined with many statements made by the central bank in the early stage, the rapid decline of long-term bonds is easy to cause financial risks and negative feedback risks for small and medium-sized banks, which is not conducive to achieving the purpose of financial stability, so the direction of its guidance on long-term bond yield expectations is clear.

In addition, on July 25, the People's Bank of China launched the MLF operation for the second time in July, with an operation volume of 200 billion yuan, and explicitly adopted the interest rate bidding method, and the winning interest rate was 2.3%, down 20 basis points from the previous time.

Why the continuation of 200 billion MLF at the current point in time? According to the analysis of the research report of Changjiang Securities, it is to protect the liquidity at the end of the month and ease the tension of selling treasury bonds. According to the data, on July 15, MLF expired 103 billion yuan, and MLF shrank slightly to continue to work by 100 billion yuan. However, since August, the scale of MLF maturity in the second half of the year will gradually rise, with 401 billion yuan due in August and 200 billion yuan renewed in advance.

China Post Securities believes that the follow-up market should pay more attention to the significance of interest rate cuts to the overall operation stage of the bond market. As the end of the third quarter approaches, the "calendar effect" of the bond market adjustment may gradually appear. After the interest rate cut is cashed, the motivation to chase the rise may gradually slow down, and it is a more prudent choice for the long-end and ultra-long-end phased profit-taking.

The currency market strengthened, and the stock market was flat

Recently, while the US dollar index has fallen and the yen exchange rate has rebounded, the sharp appreciation of the RMB exchange rate has attracted market attention.

On 24 and 25 July, the onshore and offshore renminbi continued to rise against the US dollar. On July 25, the spot exchange rate of RMB against the US dollar rose one after another to break through a number of important thresholds, rising as high as 7.2050, and the maximum rebound in the day once approached 700 points, an increase of nearly 1%.

As of 16:30 on July 25, the spot closing price of RMB against the US dollar was 7.2203, up 557 basis points from the previous trading day and hitting a new high in more than two months since May 16.

However, the A-share market does not seem to be reacting to the dynamics of interest rate cuts and RMB appreciation.

At the close of trading on July 26, the Shanghai Composite Index rose 0.14% to 2,890.90 points, the Shenzhen Composite Index rose 1.45%, and the ChiNext Composite Index rose 0.92%. The total turnover of the whole A was 610.51 billion yuan, a further contraction from 645.957 billion yuan on July 22.

At the sector level, Wind data shows that in the five trading days from July 22 to 26, bank stocks moved significantly. On July 23, among the 31 secondary industry sectors divided by Shenyin Wanguo industry, 29 industries were green, and the banking sector rose against the trend, but on July 25, the day when the six major banks announced the reduction of deposit interest rates, bank stocks generally fell. The China Merchants Securities Research Report analyzes the timing of interest rate cuts and the trend of important A-share indices after the LPR reform in 2019. Judging from the data, one month after the start of the interest rate cut, the market performance was generally better, and the average income of the ChiNext index and the large-cap growth index were among the top gainers. Historically, the market performed poorly in the week before the central bank cut interest rates and on the day the rate cuts began, but the market gradually stabilized and rebounded after the rate cuts began. However, when extended to one month, the impact of interest rate cuts on the market is relatively limited, and there is no obvious differentiation in market styles.

China Post Securities believes that from the follow-up point of view, the landing of this interest rate cut means that the relevant mechanism and target trade-off is being straightened out, and after the return of the easing cycle, the "cost reduction" operation can still be expected.