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On February 20, the central bank lowered the 5-year LPR, but the rate cut was not as effective as direct payment

On February 20, the central bank lowered the 5-year LPR, but the rate cut was not as effective as direct payment

Executive Summary:

The central bank cut interest rates sharply on Tuesday, both as expected and unexpected. Why did the central bank suddenly and vigorously lower the five-year LPR after the Spring Festival? What impact did the central bank have on the macroeconomy and micro households and enterprises? The monetary easing policy, which has lasted for many years, has already entered a stage of diminishing marginal effects. It is necessary to promote the second reform and opening up, and at the same time directly distribute money to the people to promote consumption, in order to improve the effect of monetary policy.

1. The central bank cut interest rates sharply on Tuesday, which was both expected and unexpected.

On February 20, the central bank lowered the 5-year LPR, but the rate cut was not as effective as direct payment

On 20 February, the central bank announced its first rate cut of 2024, cutting the 5-year loan prime rate (LPR) by 25 basis points from 4.2% to 3.95%. Although the 1-year LPR remained unchanged at 3.45%, the decline in the 5-year LPR

This is also the first time in 8 months that the LPR has cut interest rates after a 10 basis point rate cut in June last year, setting the largest interest rate cut since the central bank started the current round of RRR cuts, interest rate cuts, and monetary easing cycles in December 2021, and also the largest reduction since the LPR-linked mortgage interest rate.

At a press conference on the afternoon of January 24, Pan Gongsheng, governor of the People's Bank of China, announced that the reserve requirement ratio will be officially cut by 0.5 percentage points from February 5, which will provide long-term liquidity to the market by about 1 trillion yuan.

The RRR will be cut before the Spring Festival, and the interest rate will be cut after the Spring Festival. It can be said that the central bank's interest rate cut this time is both expected and unexpected.

On February 20, the central bank lowered the 5-year LPR, but the rate cut was not as effective as direct payment

The reason why I say that it is within expectation is because I have predicted that there will be two RRR cuts of 0.25 percentage points in 2024 in the third part of the article "Monetary Easing, Bond Investment, How Much Room Do We Have for Interest Rate Cuts in 2024?", "Preliminary Prediction of Monetary Policy in 2024". There will be 2-3 rate cuts of 10 points each. In 2024, the 1-year LPR will be lowered to around 3.15%, and the 5-year LPR will be lowered to around 3.9%.

The reason why it is also unexpected is that this time the central bank did not go the usual way. First, two days ago, on February 18, the People's Bank of China launched a 105 billion yuan open market reverse repo operation (OMO) and a one-year medium-term lending facility (MLF) operation of 500 billion yuan, and the MLF winning interest rate was 2.5%, unchanged from before. The sudden cut in the 5-year LPR two days later was a bit of a surprise.

Second, it is very different from the central bank's cautious 5-10 basis point reduction in the past two years, which is a one-time cut of 25 basis points, which is surprising.

2. Why did the central bank suddenly cut the 5-year LPR after the Spring Festival?

Because at the moment of vigorously depicting the bright future of China's economy, the macro economy is still facing some severe difficulties and challenges. This is not only the reason for the recent emancipation of the mind debate in Hunan Province, but also the pressure on the central bank to cut the 5-year LPR aggressively. These pressures are reflected in the following aspects.

First, the three major price indices continued to fall in January, and the decline in the consumer price index expanded, which means that consumption is still insufficient and cannot absorb supply.

On February 20, the central bank lowered the 5-year LPR, but the rate cut was not as effective as direct payment

In January 2024, the national consumer price index (CPI) fell by 0.8% year-on-year, marking the fourth consecutive month of year-on-year decline in CPI. At the same time, the CPI also recorded the largest monthly year-on-year decline since the reform and opening up.

On February 20, the central bank lowered the 5-year LPR, but the rate cut was not as effective as direct payment

In January, the national producer price index (PPI) fell by 2.5% year-on-year, marking the 16th consecutive month of year-on-year decline in PPI.

In January, industrial producer purchasing prices fell 3.4% year-on-year, marking the 12th consecutive month of year-on-year declines.

Second, the economic sentiment seems to have picked up slightly in January 2024, but the orders and employment data continue to be sluggish.

According to the Purchasing Managers' Index (PMI) released by the National Bureau of Statistics on January 31, the composite PMI, manufacturing PMI and service PMI all recovered in the first month of 2024, but the construction PMI declined significantly.

On February 20, the central bank lowered the 5-year LPR, but the rate cut was not as effective as direct payment

It is necessary to be vigilant that, judging from historical data, the manufacturing PMI in January 2024 was 49.2%, which is not only below the 50% withering line for the fourth consecutive month, but also in the contraction zone. It was also the lowest January in six years since 2019.

On February 20, the central bank lowered the 5-year LPR, but the rate cut was not as effective as direct payment

In January, the manufacturing orders in hand index fell by 0.2 percentage points to 44.3 percent from 44.5 percent in the previous month, and the employment index fell to 47.6 percent from 47.9 percent in the previous month, down 0.3 percentage points from the previous month.

The non-manufacturing orders in hand index fell sharply from 50.9% in the previous month to 45.2% in the contraction zone, a decline of 5.7 percentage points, and the employment index fell from 47.1% in the previous month to 47%, a decrease of 0.1 percentage points.

Manufacturing and non-manufacturing orders on hand have fallen sharply, and the employment index has also fallen, indicating that the economic boom continues to decline.

Third, under the dazzling data of Spring Festival consumption, there is a message of weak consumption downgrade.

On February 20, the central bank lowered the 5-year LPR, but the rate cut was not as effective as direct payment

Although the media reported that this year's Spring Festival travel performance was strong, cultural tourism recovered strongly, and the entire consumption was "hot and hot", and the concentrated release of consumer demand is becoming a new driving force for economic growth. However, due to the fact that the statistical time caliber of this Spring Festival holiday is 9 days, and the 2023 Spring Festival data only contains 7 days, in fact, consumption during the Spring Festival is not so hot.

If calculated on a daily basis, the average daily tourism revenue of the Spring Festival increased by only 10.5%, the average daily amount of online payment transactions increased by only 8%, and the average daily number of moviegoers also decreased by 1.75.

If calculated on a per capita basis, the per capita travel expenditure only increased by 9.7%, only returning to 90.5% of the per capita cost of the Spring Festival in 2019, the per capita consumption of movies fell by 6.24%, and the average ticket price of movies fell further from the same period in the previous two years, from 52.94 yuan in 2022 and 52.3 yuan in 2023 to 49.1 yuan.

Fourth, the real estate market is in a continuous downward search, and more than two years of continuous RRR cuts, interest rate cuts, and monetary easing have failed to stimulate the recovery of the real estate market.

On February 20, the central bank lowered the 5-year LPR, but the rate cut was not as effective as direct payment

According to the data of the China Index Research Institute, the sales of the top 100 real estate companies in 2022 will decrease by 29% year-on-year, 31.7% year-on-year in 2023, and 33.3% year-on-year in January 2024. During the Spring Festival holiday in 2024, the average daily transaction area of new homes in 25 representative cities will decrease by about 27% compared with the Spring Festival holiday of the previous year.

The sales revenue of the top 100 real estate enterprises was 520.7 billion yuan in January 2019, 870 billion yuan in January 2021, and 281.5 billion yuan in January 2024, down 67.6% from January 2021 before the RRR and interest rate cuts, and 45.9% lower than January 2019 before the epidemic.

3. What is the impact of the PBOC's reduction of the 5-year LPR on macroeconomic and micro households and enterprises?

According to classical economic common sense, the central bank's RRR cut before the Spring Festival can increase the scale of loans available to commercial banks. The interest rate cut after the Spring Festival can save loan costs for enterprises and individuals, stimulate enterprises and individuals to increase borrowing, and increase investment and consumption.

However, classical economic theory is based on the premise of a pure market economy. On the mainland, there are countries in the consumer market that consider important goods and services and providers that are not yet fully marketized. In the factor market, energy in the means of production market, credit market, securities market, and stock market in the capital market are also dominated by planned control. In the labor market, state-owned enterprises have only marketized zero-hour workers. Since it is not completely market-oriented, the transmission path and implementation effect of monetary policy will deviate greatly from economic theory.

On February 20, the central bank lowered the 5-year LPR, but the rate cut was not as effective as direct payment

Therefore, we can observe that during the epidemic, the fully market-oriented United States had the same monetary easing as us, but the government increased its debt and sent money to the whole people through fiscal means, which successfully stimulated consumption, resulting in a continuous increase in inflation from 2021, and the Federal Reserve began to cut interest rates and shrink its balance sheet in March 2022, and the consumption fever cooled down and inflation fell significantly.

On February 20, the central bank lowered the 5-year LPR, but the rate cut was not as effective as direct payment

And we, at the beginning of the epidemic, actually implemented monetary easing. Because there have been 5 RRR cuts from 2020 to 2021, starting in December 2021, RRR and interest rate cuts have been on the rise. As a result, you can see that the economic effect of our RRR cut, interest rate cut, and monetary easing is actually the same as the US interest rate hike and balance sheet reduction and monetary tightening. Consumption continued to weaken, and price growth continued to narrow, which has been negative since the end of last year.

As the factors affecting the effect of monetary policy continue to exist, Saburo believes that the effect of the central bank's interest rate cut on the macro economy will be as bad as ever.

However, for micro enterprises and individuals, it can reduce the cost of borrowing.

In terms of credit costs, new medium and long-term loans after the interest rate cut will be 0.25% less loan interest per year. The personal housing loan is calculated according to the method of 1 million yuan, 30 years, and equal principal and interest, and the monthly payment can save 144.8 yuan without considering the additional points.

However, the continued increase in credit to enterprises and individuals has had limited effect. In turn, the effect on stimulating consumption and investment is also limited.

The reason for this is that our corporate and personal debt burdens are so high internationally that we are on the verge of having to repair our balance sheets.

By the end of 2023, our household debt-to-income ratio has increased from 128.5% in 2019 to 143.4%, surpassing all developed countries by at least 30 percentage points, and the corporate leverage ratio has increased from 151.9% in 2019 to 168.7%, while the corporate leverage ratio in developed countries is generally below 100%.

The higher the debt-to-income ratio and the higher the corporate leverage ratio, the larger the base for interest payments. In 2019, the balance of corporate debt was 150.3 trillion yuan, and the balance of household debt was 55.4 trillion yuan. At the end of 2023, the balance of corporate debt increased by 41.4% to 212.5 trillion yuan, and the balance of household debt increased by 44.6% to 80.1 trillion yuan. However, the five-year LPR was only lowered from 4.85% to 3.95%, a reduction of only 18.6%, which is only half the rate of increase in debt, which means that the interest burden of enterprises and households is still increasing significantly. And given their current level of debt burden, there is no room for further increase.

Fourth, the monetary easing policy, which has lasted for many years, has already entered a stage of diminishing marginal effect. It is necessary to promote the second reform and opening up, and at the same time directly distribute money to the people to promote consumption, in order to improve the effect of monetary policy.

On February 20, the central bank lowered the 5-year LPR, but the rate cut was not as effective as direct payment

The monetary easing, which has lasted for many years, has not reaped the economic overheating, but the economic overcooling, with the CPI being negative for several months, the PPI being negative for more than ten consecutive months, and the sales of commercial housing being negative for 32 consecutive months. This is the first time since the beginning of reform and opening up that such an economic situation has been made.

Saburo believes that we need to realistically face the problems of the current monetary policy on the general oversupply, insufficient demand, declining corporate profitability, reduced employment opportunities, and declining residents' income and willingness to consume.

In the process of implementing our monetary policy, it has been affected by the signal distortion and flow failure caused by the economic development model, the dual ownership system, the planned money supply mode and the market-oriented capital demand, and the effect is worrying. The debt problems of local government investment and financing platforms, such as real estate debt, are more thorny; the shortage of demand caused by the distribution system has also become a blockage point of monetary policy; the problem of decoupling and de-risking in the West and the problem of our population reduction have also brought additional tests to the effectiveness of monetary policy.

In the face of the current complicated economic situation, I am afraid that it can no longer be solved by following the previous counter-cyclical adjustment and monetary easing policy.

On the one hand, we must promote the second reform and opening up to be able to solve the above problems, and continue to cut the reserve requirement ratio and interest rates sharply to be effective.

On the other hand, monetary policy should not be alone, fiscal policy should do something, stop those large amounts of duplicate investment and inefficient or even ineffective investment, stop and send money directly to the people, so as to promote consumption and digest excess supply.

[Author: Xu Sanlang]

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