"Chief Observer" Cuts the RRR as Scheduled China's economy is "stable" at the forefront

Economic Observation Network reporter Ouyang Xiaohong

One

Smart capital must have smelled a special smell - on December 6, although the three major A-share indexes closed down, both markets rose in the morning, and the securities industry led the rise.

On this day, the Politburo of the Central Committee held a meeting to analyze and study the economic work in 2022. "Steady word as the head", "four stable joints", and "six stability and six guarantees" were recalled; for a time, the voice of maintaining "stability" was everywhere.

"The most important goal of China's macro environment in 2022 is one word, stability; policy has been officially turned to stabilize growth." Xiong Yuan, chief economist of Guosheng Securities, analyzed.

Its logic lies in several key expressions: highlighting the word stability as the head; re-mentioning "six stability, six guarantees"; "maintaining economic operation in a reasonable range"; "expanding domestic demand, promoting consumption, and expanding investment" at the top of next year's key work; "affordable housing construction" at the top of real estate policies; also paying attention to 4 "no mentions": no mention of "cross-cycle adjustment", no mention of "housing and not speculation", no mention of "double carbon", no mention of "common prosperity", tend to think, do not over-interpret.

On this day, Chinese Bank also announced that it would cut the reserve requirement ratio by 0.5 percentage points from December 15.

Different from the past, Zhang Yu, assistant director of Huachuang Securities Research Institute and chief macro analyst, believes that the time for the announcement of the RRR cut is on Monday, not the usual Friday and Sunday. The aim may be to maximize policy effectiveness. The same policy tools, the shorter the time for the market to digest, the more significant the effect, can be described as four or two thousand pounds, short-term good for equity and debt.

In addition, the choice of the date of the reduction is also stuck on the date of the expiration of the MLF. Zhang Yu analyzed that on December 15 this year, the expiration of MLF was 950 billion. As of October 2021, the proportion of the central bank's claims on other depository companies in total assets reached 33.69%, which has exceeded one-third of the central bank's assets. In November, the central bank has renewed 1 trillion MLF, and there are still 500 billion MLF due in January 2022, so it is more difficult to operate the sequel, so it is a better choice to reduce the RRR on December 15 to hedge the MLF or adjust the structure of the central bank's balance sheet.

It is also different from the comprehensive RRR cut in July this year. As downward pressure on the economy increases, the market has been expecting monetary policy easing. On December 3, when meeting with the President of the International Monetary Fund (IMF), the Prime Minister mentioned that "continue to implement a prudent monetary policy, maintain reasonable and sufficient liquidity, formulate policies around the needs of market players, use multiple monetary tools, reduce the RRR in a timely manner, increase support for the real economy, especially small and medium-sized enterprises, promote the stabilization and decline of comprehensive financing costs, and ensure the stable and healthy operation of the economy." Two days later, the central bank announced a comprehensive RRR cut.

However, this turn is not the other. Does this RRR cut mean a change in the direction of prudent monetary policy?

The relevant person in charge of the central bank said that the direction of prudent monetary policy has not changed. The RRR cut is a routine operation of monetary policy, and some of the funds released will be used by financial institutions to return the expired medium-term lending facility (MLF), and some will be used by financial institutions to supplement long-term funds to better meet the needs of market players.

The purpose of the RRR cut is to strengthen cross-cycle adjustment, optimize the capital structure of financial institutions, enhance financial service capabilities, and better support the real economy. "The RRR cut is a comprehensive RRR reduction, except for some county-level legal person financial institutions that have implemented a 5% deposit reserve ratio, and the deposit reserve ratio has been generally reduced by 0.5 percentage points for other financial institutions, and the RRR reduction has released a total of about 1.2 trillion yuan of long-term funds." The central bank said.

Lu Ting, chief economist at Nomura Securities China, estimates that about 500 billion yuan will be used to replace expiring MFPs, resulting in a net injection of about 700 billion yuan.

Looking back at the international macro environment of the RRR cut in July, the main reason for the simultaneous resonance of the global market at that time was that among the 194 WHO members whose epidemic had once again fought back, the strain of the new crown variant virus Delta (Delta) spread in 104 countries and regions.

At this time, the new crown mutant strain Omicron (Omicron) that appeared at the beginning shocked the global market, but A shares resisted falling. If you look at the global market as of December 6, there is a divergence. On the same day, the European and American markets were all higher, with the German DAX30 (15380.79, +1.39%), the British FTSE 100 (7232.28, +1.54%), and the French CAC40 (6865.78, +1.48%); the US Dow, S&P 500, and nasdaq closed up 35227.03 (1.87%), 4591.67 (1.17%), and 15225.20 (0.94%), respectively.

Two

If the July RRR cut "confused" the market, then the December cut criterion is expected; between change and invariance, in addition to stable growth, the latter may have more "plans" for 2022.

Looking at the two, similarly, to a large extent, the December RRR cut was to increase support for small and micro enterprises and cope with the downward pressure on the economy; in this regard, the July RRR cut is the same.

On July 7, the National Standing Committee proposed that in view of the impact of rising commodity prices on the production and operation of enterprises, monetary policy tools such as RRR reduction should be used in a timely manner to further strengthen financial support for the real economy, especially small and medium-sized enterprises. Two days later, the central bank announced a comprehensive RRR cut and said that "the RRR cut will not lead to flood irrigation"; in December, the central bank reiterated these ten words.

At that time, the market was still entangled in the high price of commodities; at that time, on the one hand, the price of commodities in the category of inflation was raised, and on the other hand, the policy tool to deal with deflation was "reduced", and the market seemed to be confused: equity and debt deduced "ice and fire double days". The 10-year treasury bond once broke 3%; the Shanghai Composite Index, the Shenzhen Composite Index, and the Shanghai Securities 50 closed at 3525.50 (-0.79%), 14882.90 (-0.38%), and 3373.26 (-1.47%), respectively. On the 9th, smelling the "RRR reduction" signal, the A shares that had been down in the morning stabilized again.

Afterwards, when the July economic data came out, the market realized the significance of the "7.15" RRR cut - under the pressure of the economy, between inflation and stable growth, the latter became the first choice; but this is the market's one-sided understanding, the solution should be: when the economy is down, we need to find a balance between stable growth, risk prevention, and reform.

This time, two days after the prime minister mentioned a "timely RRR cut" during a meeting with the IMF president, the central bank announced a comprehensive RRR cut. What is different is that the downward pressure on the economy is increasing. Li Qilin, chief economist of Hongta Securities, believes that the big difference between now and July is that the current downward trend of PPI is relatively clear, and if it is only from the pressure from the cost side, the central bank may not cut the RRR.

The logic is that the real estate, exports and other real estate that originally supported China's economy are weakening. In this case, in addition to the pressure on the cost side, small and micro enterprises are also facing the pressure of falling demand, so the demand for policy force is improved.

Li Qilin analyzed that greater pressure comes from real estate, affected by the previous regulatory policies, real estate investment has entered a downward range since the second half of 2021, and the economic growth rate has changed from a support item to a drag item.

"Although the policy bottom has emerged, there is a certain time lag from the policy bottom to the industry bottom. In particular, the marginal relaxation of this round of policies is still cautious, and under the long-term mechanism of real estate, it is difficult to see the traditional stimulus from the demand side. The current policy on the demand side also focuses on the credit of just-needed users. Li Qilin thought.

The overall stabilization of the real estate industry is very important to the stabilization of the sales side. Judging from the current sales of real estate, the real estate sales end has still not picked up significantly.

And "the pressure of real estate investment to fall is highlighted" may also become the first of several forces to promote the reduction of the RRR. Wu Chaoming, chief economist of Caixin Securities, analyzed that the stabilization of the macroeconomic market is affected by the joint influence of four forces: the downward pressure on real estate investment is highlighted; the recovery of consumption is still facing resistance; the strength of infrastructure recovery may be limited; and the contribution of exports is likely to weaken. For example, as of November, the PMI of domestic new export orders has been in the contraction range for seven consecutive months, and the global manufacturing PMI has also maintained a slowdown overall.

In fact, from another point of view, the market is not short of money, and liquidity may not be tight. Observing market interest rates is the scientific way to judge the degree of liquidity tightness. The central bank has also repeatedly proposed in monetary policy implementation reports and important meetings that one of the most important indicators for observing liquidity is the weighted average interest rate (DR007) of the 7-day repurchase in the money market, and the average value of domestic DR007 from January to September is 2.18%, which is only 2 basis points away from the central bank's 7-day open market operation interest rate, indicating that the overall supply and demand of liquidity in China is very stable.

In Li Qilin's view, when the downward pressure on the economy gradually increased in the second half of this year, monetary policy has been relaxed on the margin, and the overall market funding rate has been maintained at a stable and loose level, with the average interest rate level of DR007 from September to November 2.17%, lower than the policy interest rate of 2.2%.

According to this standard, on December 7, DR007 reported 2.1510; on October 9, it even reported a low of 1.8266 in recent months; Thus, market liquidity may not be an issue.

What the market lacks is confidence and confidence, which is both cyclical factors and many superimposed factors such as the epidemic and the impact of global supply chains. 2021 is about to turn over, the epidemic is still spreading globally, the supply of hard constraints is increasing, and the international macro situation is full of uncertainty; since the "stable word is the head", and since the transformation of new and old kinetic energy is not yet mature, the high-hanging "Damocles" regulatory sword needs to be cautious, and the premise of its fall may be the stability and long-term development of the economy.

Take real estate as an example, which is the mother of the cycle, nine of the ten crises of real estate. The sustainability of the "land system and housing finance" may be considered as an important consideration in regulation. But the reality is: real estate serves economic growth, and the construction of the housing system takes into account housing responsibility and macro-control; real estate regulation and control policies often emphasize short-term regulation and control, and light on long-term mechanisms.

Since the implementation of the "three red lines" for the financing of housing enterprises in China since january 1, 2020, all sources of funds for real estate have declined significantly, and the financing needs of key housing enterprises may be significantly constrained. However, recent policies have been corrected, and the financing of housing enterprises has begun to loosen. "The current weakening of the real estate market is not only due to policy tightening, but also the result of a combination of factors such as the weakening of long-term real estate demand and the spillover effect of Evergrande's debt events." Wang Tao, chief China economist at UBS, thinks.

In Wang Tao's view, the government is now more focused than ever on curbing excessive real estate leverage and rising house prices. However, the purpose of this is to reduce real estate-related risks, not to achieve certain hard targets.

Three

Perhaps, it is not that the current liquidity is not tight, there is no need to loosen, the year is about to close, but also need to take into account the overall consideration, consider the cross-cycle arrangement.

"The reduction of the standard has a reason, role and significance for the reduction of the standard. It is a fact that the downward pressure on the economy is great, and it is also a fact that policies are needed, but it can be sooner or later. The current decline is to increase credit delivery in the first quarter, which is its role. A senior private equity source said, "Because the credit volume in the first quarter accounted for at least 40% of the whole year." ”

The logic is that increasing credit requires capital. At this stage and the end of the year, it is the time for enterprises to repay loans, and it is also the time for commercial banks to reserve projects, and it is necessary to lend money in the new year and after New Year's Day. The RRR cut on December 15 is only half a month from next year, which is exactly the preparation time for commercial banks.

The "Economic Blue Book: Analysis and Forecast of China's Economic Situation in 2022" released on December 6 pointed out that in 2021, under the normalization of epidemic prevention and control, China's economy generally showed a good recovery trend, but in the uncertain and unstable epidemic and external environment, the downward pressure on the economy has increased, and there are more risks and challenges to maintaining the stable operation of the economy. China's economy is expected to grow by 8.0% in 2021 and about 5.3% in 2022.

Xu Hongcai, deputy director of the Economic Policy Committee of the China Policy Science Research Association, said in an interview with the media that the current downward pressure on the world economy is relatively large, and so is the Chinese economy, so to curb the momentum of decline, we must pay more attention to stable growth. Especially next year, the world economy is expected to slow down, external demand will contract, and the good days of china's foreign trade growth of more than 20% this year may be difficult to reproduce next year. Therefore, we must seek progress in stability, strive to achieve high-quality development, and calmly cope with the new international and domestic challenges facing the present and the future.

So, is there room for rRR reduction in the follow-up? Wu Chaoming expects that there is still some room for the reduction of the RRR, but the space has become increasingly tight. Since 2018, the central bank has lowered the reserve requirement ratio 12 times, and the average statutory reserve requirement ratio of financial institutions has dropped to 8.4%; the total reserve requirement ratio after the excess reserve requirement ratio is basically comparable to or slightly lower than that of major global economies.

"It is expected that the probability of the interest rate cut being postponed to the first half of next year is large." Wu Chaoming analysis, according to historical experience, each round of domestic interest rate cuts at the starting point occurs after a period of time after the comprehensive inflation index has declined, although the current PPI in China has peaked, but the CPI will still pick up, the comprehensive inflation index will fall slowly or slowly, and do not support premature interest rate cuts. But in general, the economic downturn cycle, interest rate cuts or will be late but will not be absent, is expected to be launched in the first half of next year the probability is large.

But there is also a market voice that believes that oil prices will still be high, which will bring higher inflation than expected; if high inflation strikes, it may force the central bank to offer a "rate cut" strategy. "But 99.99 percent of the people in the market don't believe there will be a spike in oil prices." The above-mentioned senior private equity person said.

The current reality is that due to the high inflation pressure of the world, at least 27 countries have raised interest rates this year; data show that in 2021, the inflation rate of more than 80 countries and regions around the world hit a new high in nearly 5 years, and the overall global inflation rate will reach 4.3% in 2021. The Fed has opened taper and may raise interest rates in the middle of next year.

China's economy has taken the lead in recovering, but the current downward pressure has increased, including the call for "interest rate cuts".

The central bank has pointed out in the third quarter monetary policy implementation report "Column" that the current round of monetary policy easing in developed economies is faster and more intense than the previous round, and after the adjustment begins, it will promote the rise of the US dollar index and the rise of US Treasury yields, and may have an impact on emerging economies.

However, the central bank believes that the current internal and external environment facing China is significantly different from the previous round, and the policy adjustment of developed economies has limited impact on me. There are four reasons: at present, China's macroeconomic volume is expanding and its resilience is stronger; China adheres to the implementation of normal monetary policy; China's exchange rate market-oriented reform has made progress and its ability to absorb external shocks has been enhanced; China's financial system has become more autonomous and stable, and the attractiveness of RMB assets has increased.

The voiceover is that we don't need to dwell on the possible exchange rate "spillover risk". Logically, if the dollar raises interest rates, money from emerging markets could flow back to advanced economies. But today is not what it used to be, and China's economy, which has entered a stage of high-quality development, is more resilient, although China's economy has never been so close to the growth rate of the global economy. For example, the IMF expects the global economy to grow by 5.8% in 2021 and 4.9% in 2022.

Liu Shijin, vice chairman of the China Development Research Foundation, once told the Economic Observer Network that because China's economy is already very large, even if it maintains a growth rate of 5-6%, the new economic growth rate every year is still at the forefront of the world. Supporting such new additions will not be easy. Expanding and stabilizing the sources of growth for medium- and high-quality development will be an important challenge.

Finally, "back to common sense, the living water of the RRR cut will flow to the real economy, and all that is needed is a good institutional environment - interest rate marketization, bank commercialization." Experts said that structurally, there are two major dislocations, the outbreak time of the epidemic cycle, and the time for China and other countries to resume work and production are all misaligned; including the matching macro policies.

In any case, as far as the market is concerned, the RRR cut is expected to have limited stimulation to the capital market in the short term, and form a certain support for the stock market and the bond market in the medium term. Wu Chaoming thought.