Zhang Jingjing, Chief Macro Analyst of Western Macro
Chinese Min min bank authorized the National Interbank Lending Center to announce that the loan market quotation rate (LPR) on January 20, 2022 is: 3.7% for 1-year LPR and 4.60% for 5-year LPR. Compared with the previous month, the 1-year LPR quotation was lowered by 10BP and the 5-year LPR was lowered by 5BP.
First, the LPR was lowered as scheduled, and the reduction was in line with the convention
After the mid-term lending facility (MLF) interest rate was cut by 10BP on the 17th of this month, the reduction of the LPR quotation rate was in line with the policy interest rate transmission mechanism of the People's Bank of China, and the market's expectations for the reduction of the LPR quotation rate were sufficient enough, and the divergence was mainly in the decline of the 5-year LPR. We believe that the 5-year LPR reduction of 5BP is in line with convention.
Looking back at the reduction of the LPR quotation rate after the MLF rate cut since 2020, it can be seen that after the two MLF cuts in February and April 2020, the reduction of the 5-year LPR interest rate in that month was half of the MLF reduction.
It is worth mentioning that the adjustment of the 5-year LPR interest rate is another adjustment after a gap of 21 months. Since the 5-year LPR is the anchor for banks to issue medium- and long-term loans, the scope of its impact includes medium- and long-term loans in manufacturing, fixed asset investment and personal housing loans. From this perspective, taking the real estate market as an example, although the 5-year LPR change is not directly related to the real estate policy, the reduction of the 5-year LPR interest rate can indeed be understood to a certain extent as a demand-side policy. The reduction in the interest rate of personal housing loans has helped to release the reasonable demand in the real estate market. Of course, in the context of "housing and not speculation", the decline of 5BP also reflects the determination of the policy: in accordance with the basic principle of "implementing policies for the city", implement a long-term real estate management mechanism, and do not use real estate as a short-term means to stimulate the economy.
Second, the wide credit is not reached, and the wide currency is not stopped
At this week's financial data conference of the People's Bank of China in 2021, Vice Governor Liu Guoqiang mentioned three points when answering the requirements of how to implement the central policy force of monetary policy, which greatly boosted market confidence. The three points are: 1, sufficient force, the monetary policy toolbox is larger; 2, precise force, take the initiative to attack; 3, forward force. We believe that the above statement conveys a clear message to the market that monetary policy will continue to guide the steady growth of credit.
Judging from the interest rate reduction cycle in 2019-2020, the People's Bank of China has achieved a rebound in loan demand by lowering the policy interest rate three times. This round of steady growth is facing the "triple pressure of demand contraction, supply shock, and weak expectations". Taking the second half of 2021 as an example, the year-on-year decrease in medium- and long-term loans and personal housing loans for enterprises is an important part of the drag on new loans, and this part of the loan demand is often related to expectations. Monetary policy has an irreplaceable role in reversing expectations, so we judge that the follow-up loose monetary policy can be expected.
As for the policy space of the People's Bank of China, which is more discussed in the market, we have pointed out in many reports that during the Fed tightening stage, the biggest risk (one) of China's monetary easing is that the RMB exchange rate is under greater depreciation pressure. In 2022, what we need to worry about is not the depreciation of the RMB exchange rate, but the excessive appreciation. Since the beginning of the epidemic, due to the increase in export share and other reasons, the real effective exchange rate of the renminbi has appreciated by more than 7%, the highest in the world. Under such circumstances, it is possible for the policy authorities to allow the renminbi to depreciate moderately, which provides a certain "self-centered" space for the mainland's monetary policy.
Third, if the economic data in January does not perform well, continuous interest rate cuts can be expected
In our previous report, we mentioned that the first quarter of this year is of great significance to the economic environment for the whole year. Therefore, the economic data for the beginning of 2022 will be an important reference for policymakers to formulate follow-up policies. Recently, more grassroots surveys show that the credit delivery in the beginning of the year is not optimistic, the core reason is that the early project reserves are insufficient and the immediate demand is insufficient, and the People's Bank of China also rarely mentioned "preventing credit collapse" at this week's financial data conference, expressing the concern of the regulatory layer.
If you look at it from the perspective of banks, the two RRR cuts and one interest rate cut in the previous period have been reflected in the current LPR reduction. At present, the net interest margin of banks is at a low level, which means that it is more difficult for banks as the main body to take the initiative to further reduce the pressure and add points, and the subsequent downward trend of LPR still needs to rely on the guidance of aggregate monetary policy.
According to the monetary policy operation in 2021, the two RRR cuts in July and December led to the reduction of banks' LPR quotations for the first year of December. If we look at the law of "two comprehensive RRR reductions = one LPR reduction step", the significance of short-term RRR reduction is limited. For quick boot expectations, down-down MLF is a better option. We believe that if the social finance data in January is not good, the People's Bank of China is expected to quickly carry out the operation of reducing the MLF for the second time in the year.
Risk Warning
(1) Economic fundamentals have fallen faster than expected
(2) Overseas central banks' monetary policy tightened more than expected
(3) Lack of understanding of monetary policy
This article originated from the financial world