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China Fund News Taylor

Hello everyone, today is Monday, and there are two major events happening in the market that are worth paying attention to!

Major changes to A-shares! Effective today

Previously, the China Securities Regulatory Commission announced on July 10 that it had approved China Securities Finance Corporation's application to suspend its securities lending business in accordance with the law, which will be implemented from July 11, 2024. Existing securities lending contracts can be extended, but must be settled no later than September 30.

At the same time, it is approved that stock exchanges will increase the margin ratio for short selling from no less than 80% to 100%, and the margin ratio for private securities investment funds participating in short selling will be increased from no less than 100% to 120%. This will be implemented from July 22, 2024, which means from Monday.

Wind data shows that as of July 18, the balance of securities lending has dropped to about 29.5 billion yuan, a new low in the past four years.

There is a difference between securities lending and short selling. Securities lending refers to the business activity of securities financing companies lending their own or borrowed securities to securities companies for them to handle short selling business, while short selling refers to the behavior of investors providing collateral to securities companies, borrowing listed securities from them and selling them. The two are two different securities circulation processes.

According to the analysis, the increase in the margin ratio of private equity investment funds directly led to a reduction in the leverage ratio of securities lending by private equity investment funds, an increase in the cost of related transactions, and an impact on the execution of securities lending-related trading strategies by private equity investment funds, such as long-short trading strategies. This provision mainly increased the cost of securities lending by private equity investment funds, and had a restraining effect on some private equity investment funds using securities lending tools and taking advantage of information and funds to conduct transactions, which helped to improve the fairness of transactions for investors in the market.

This policy has a significant inhibitory effect on the market short-selling force formed through margin trading, and under this policy background, the possibility of increased buying in the market in the next three months will increase, which is of positive significance for boosting market confidence and increasing the overall probability of short-term rise in A-shares.

Huachuang Securities' financial team believes that this is an important measure for the counter-cyclical adjustment of the securities lending business, which reflects the regulatory authorities' continuous monitoring and timely response to market risks. The recent system adjustment is in line with the top-level design spirit of the Third Plenary Session of the 18th CPC Central Committee. On the one hand, the increase in the margin ratio for securities lending has increased the securities lending transaction costs of investors and reduced the leverage level of securities lending transactions, thereby easing market sentiment and reducing market volatility, which can promote the healthy development of the capital market. On the other hand, the increase in the margin ratio for securities lending is in line with the implementation of the spirit of the Third Plenary Session of the 18th CPC Central Committee by the securities regulatory system, and the explanation of the overall development and security of the capital market and the use of reform methods to solve the deep-seated contradictions and problems that restrict the stable and healthy development of the capital market.

July LPR data will be released

The latest LPR data will be released on July 22.

Analysts believe that the LPR quotation results on Monday may become the focus of market transactions. The Financial Times, a subsidiary of the central bank, published an article on July 12 titled "LPR may be improved!" The article mentioned that "the medium-term lending facility rate has a certain reference role in LPR pricing, but it is not completely linked", "there is a certain deviation between the current LPR quotation and the loan interest rate of the best customers, and it is necessary to strengthen the quotation quality assessment in the future to reduce the deviation", "the central bank will clearly use the short-term operating interest rate as the main policy interest rate, which means that my country's monetary policy regulation framework will undergo an important transformation in the future" and other information. The content may reflect that the pricing reference of LPR may switch from the MLF interest rate to the OMO interest rate.

CITIC Securities analyzed that, referring to overseas experience and recent policy statements, it believes that the LPR quotation mechanism may be improved to enhance policy efficiency and marketization.In the short term, the LPR quotation is also expected to be lowered.Create more suitable policy conditions for credit recovery. With the advancement of LPR reform, financing costs continue to decline, and it is expected that the potential for loan issuance will be further released. Although it is difficult for the growth rate to rebound significantly in the short term, the overall structure will be optimized and the quality and efficiency of financial service entities will also be improved.

Galaxy Securities' macroeconomic team analyzed that the central bank will adopt a "different" interest rate cut, and the LPR may be lowered by 10BP-20BP in July. Lowering the LPR alone will guide the financing costs of the real economy downward to promote economic growth. Since 2023, the reduction in the LPR has been freed from the constraints of the MLF.

Galaxy Securities analyzed that the LPR may be lowered in July based on three reasons:

First, the current LPR quotation is significantly deviated from the actual most favorable customer interest rate, and the quotation quality needs to be improved;

Second, considering the cost of bank funds, risk premium, supply and demand, etc., there is room for the current LPR quotation to be lowered. The ban on "manual interest payment" was introduced in April, and the cost of bank funds may decline in the second quarter, and the pressure on net interest margin may be reduced;

Third, the current real interest rate is high and needs to be further reduced to promote economic growth. The necessity of reduction is increasing. At this stage, the real interest rate is high and the endogenous financing demand of the private sector is weak. The financing interest rate for the purchase of housing by the resident sector is still higher than the return on investment. From the perspective of the government, the issuance of local government special bonds has been slow since 2024, and one of the reasons is that the return on investment is not enough to cover the cost.

Galaxy Securities analyzed the possible impact of lowering the LPR on the 10-year treasury bond yield. Under the interweaving of the two forces, the 10-year treasury bond yield may enter a short-term oscillation. If the LPR is lowered, it may further push down loan interest rates, and the price comparison effect will form a force that drives bond interest rates down. However, "the central bank is very determined to maintain a normal upward yield curve and correct bond market risks", and the central bank may choose the opportunity to sell treasury bonds.

The latest report from Shenwan Hongyuan also pointed out that expectations for both the reform and reduction of the LPR mechanism are strong: on the one hand, the focus is on whether the LPR will be decoupled from the MLF interest rate and linked to the OMO interest rate, thereby completing the policy interest rate reform and focusing more on the short-term policy interest rate; on the other hand, considering that current credit demand is obviously weak and July-August is also the mid-year window for stabilizing growth, although the central bank continues to pay attention to long-term debt risks, the need to lower the LPR is still strong.