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Text: Ren Zeping Team

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On July 25, the central bank announced that in order to maintain a reasonable level of liquidity in the banking system at the end of the month, a fixed-rate, quantity-based tender was conducted on July 25 for RMB 235.1 billion.Reverse repoIn addition, a 200 billion yuan medium-term lending facility (MLF) operation was carried out through interest rate bidding, with an operating interest rate of 2.30%.

On July 25, the six major banks, Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, Construction Bank of China, Bank of Communications, and Postal Savings Bank of China, all lowered their deposit interest rates. Among them, the three-month, six-month, and one-year fixed deposit interest rates were all lowered by 10 basis points to 1.05%, 1.25%, and 1.35% respectively; the two-year, three-year, and five-year fixed deposit interest rates were all lowered by 20 basis points to 1.45%, 1.75%, and 1.8% respectively.

Core Viewpoint

The current policy thinking has changed, and the policy focus has shifted from stabilizing exchange rates and interest rates to stabilizing growth and employment. We are facing a new round of interest rate cuts.After the OMO, LPR and SLF were uniformly lowered by 10bp on July 22, the central bank announced a 20bp MLF rate cut on July 25. It is rare to conduct MLF operations twice within a month. At the same time, the six state-owned banks announced a reduction in the deposit listing rate, ranging from 10-20bp depending on the deposit term. Although the economy is still facing multiple target constraints, it can be seen that the policy is actively making room for maneuver, releasing a clear signal of stabilizing growth and boosting market confidence.

How to understand the recent intensive interest rate cuts by the central bank?

Internally, we must seize the time window to stimulate domestic demand.The Third Plenary Session of the 13th CPC Central Committee announced that it would "unswervingly achieve the annual economic and social development goals".GDPThe growth rate of 5% is basically supported by exports and manufacturing investment. In the future, external demand will face downward pressure and trade uncertainty will increase. We must take advantage of the current precious time window to stimulate domestic demand and boost consumption and prices.

Externally, the world is embarking on a new round of interest rate cuts.Since 2024, the central banks of Canada, Switzerland, Sweden, and the European Central Bank have "preemptively" cut interest rates before the Federal Reserve. U.S. inflation has fallen, and expectations for interest rate cuts have increased. The market generally predicts two interest rate cuts this year. The RMB exchange rate has strengthened, and the exchange rate constraints have further weakened. The future monetary policy will be based on China.

Is interest rate cut useful? Yes!First, reduce the debt interest burden and boost the financing demand of enterprises and residents. Second, boost prices. Although the nominal interest rate is falling, the real interest rate is still high under the low price situation, and the low price situation needs to be managed. Third, repair the balance sheet of residents. The resident sector is facing an uncertain employment and income situation, shrinking asset prices, and shrinking risk appetite. Money flows out of high-growth, equity and other assets and gathers in low-risk assets such as bank deposits, high dividends, and government bonds. It will further transmit the risk reduction in the capital market, consumption, investment, production and other fields. The interest rate cut will help boost asset prices and break the vicious cycle expectation.

Stabilizing growth is not just a matter of lowering interest rates, but requires a package of stimulus plans. It is expected that the July Politburo meeting will continue to send easing signals.It is recommended to continue to reduce the reserve requirement ratio and interest rates, lower the actual interest rate, lower the interest rate of existing mortgage loans, fully relax the restrictions on real estate purchases, increase the storage of housing banks, coordinate fiscal policies to expand expenditures, and accelerate the recovery of corporate and resident balance sheets. Rest and recuperate, reduce tax burdens, and boost confidence. Confidence is more important than gold.

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1. How to view the MLF rate cut: follow up with the reduction and send a signal of stabilizing growth

1) Switching the monetary policy framework takes time. The status of MLF has weakened, but it remains the main interest rate anchor.The monetary policy control framework is undergoing transformation. Although the central bank has made it clear that the OMO interest rate is the new anchor of the policy interest rate, there are still many interest rates linked to the MLF in the short term. As of June, the balance of MLF was 7,073 billion yuan, at a historical high, accounting for about 1.8% of the entire banking industry's liabilities. Both the quantity and price indicate that the MLF will maintain its ability to influence the liquidity of the interbank market for a long time. The benchmark interest rate swap is not achieved overnight, but is a step-by-step process, first establishing and then breaking.

2) Seize the time window and inject liquidity into the market.The US economic data in June led to stronger expectations of interest rate cuts, which opened up the constraints of my country's monetary policy exchange rate. The domestic economy is weak and financing is insufficient, so a strong interest rate cut is needed to stimulate domestic demand. At the same time, the "big fiscal and tax month" in July absorbs liquidity, and a large number of MLFs will expire from August to the end of the year. In addition, the central bank may sell government bonds to prevent and control long-term interest rate risks, which all bring expectations of liquidity demand.

3) Method: Mainly compensatory reduction, with the timing exceeding expectations and with great force.

New temporary operations have been added, mainly to make up for the reduction.The regular MLF window operation on the 15th of this month was an equal renewal, and this MLF operation was an additional 200 billion liquidity injection. The first unconventional injection in the past three years was mainly for the purpose of compensating for the reduction. At the same time, as the latest interest rate cut in the month, it shows that the central bank is weakening its policy.

The force is large and strengthens the signal of easing.The 20BP rate cut is the largest rate cut in history, higher than the 10BP rate cuts of OMO and LPR on Monday. In terms of volume, the net MLF injection has been zero since 2024, and the net MLF injection has risen to 195 billion yuan after this injection.

4) Impact: The signal significance is stronger than the actual significance, and it releases policy guidance.

The signal is stronger than the actual meaning.MLF is a follow-up cut following the OMO and LPR rate cuts. The market has fully absorbed the impact of the rate cut. The MLF rate is 2.3% after the rate cut, which is still higher than the current 1-year interbank deposit rate of about 2%. The stimulus effect is limited. However, the timing of the intensity exceeding expectations still brings positive signal significance.

The longer-term impact is that the central bank will "demonstrate" the transmission path of the new monetary policy framework, and the MLF policy interest rate will be weakened.In the past, MLF directly affected the LPR interest rate on the monetary side.BondsThe 10-year treasury bond rate on the monetary side indirectly affects the deposit rate, thereby affecting the money market, bond market, and deposit and loan market at the same time, becoming the most important policy rate. However, after multiple asymmetric operations of MLF and LPR, the original impact path was limited, and the MLF policy rate faded. This week, the central bank's operations "demonstrated" the transmission path of the new monetary policy framework: the 7-day OMO interest rate directly affects the LPR interest rate on the monetary side, indirectly mobilizes the deposit listing rate, and the MLF interest rate is supplemented. The policy orientation of adjusting the monetary policy interest rate framework is obvious.

2. How to view the collective reduction of deposit interest rates: easing the pressure on banks' net interest margin

1) Reason: Net interest margin continued to decline to a historical low, and banks were under great operating pressure.

In the first quarter of this year,commercial BankThe average net interest margin was 1.54%, down 15bp from the fourth quarter of last year, narrowing to the lowest level in history, and falling below the warning line of 1.8% for net interest margin. In addition, in April this year, the regulatory authorities rectified the banks' illegal manual interest payments, effectively reducing interest expenses, and the effect was close to a one-time reduction in deposit rates. In the first quarter of 2024, the net profit of commercial banks increased by 0.66% year-on-year, down nearly 2.6 percentage points from 3.24% year-on-year in 2023, and the year-on-year growth rate of net profit of large state-owned banks turned into a negative growth range. In the context of interest rate cuts, in order to ease the pressure on net interest margins, banks have the need and motivation to lower their liability costs.

2) Method: The decline in medium- and long-term deposit interest rates is greater, and it is expected that small and medium-sized banks will follow suit.

Two rounds of interest rate cuts have been implemented since the beginning of this year. Deposit rates may start a new round of cuts, and the decline in medium- and long-term interest rates may be even greater.Since the beginning of this year, the inverted interest rate of bank deposits has continued to exist. In June, the interest rates of three-year and five-year fixed deposits were 2.507% and 2.433% respectively. This time, the bank lowered the deposit interest rate, and the medium- and long-term deposit interest rate dropped significantly. While stabilizing the bank's liability costs, it is conducive to alleviating the problem of long-term deposits. It is expected that the subsequent medium- and long-term deposit interest rate will drop further.

The large state-owned banks have collectively lowered their deposit interest rates. It is expected that national joint-stock banks and small and medium-sized banks may follow suit in batches.According to the deposit market adjustment model of "large state-owned banks take the lead in adjustment, joint-stock banks quickly follow up, and other banks gradually follow up" and past experience, small and medium-sized banks will also gradually follow up and adjust.

3) Impact: The pressure on bank net interest margins is relieved, and the savings tendency of enterprises and residents is reduced

Alleviate the pressure on bank interest rate spreads and stabilize bank profits.Based on the interest rate marketization adjustment mechanism, banks can make timely adjustments to deposit pricing, which will help ease the pressure on net interest margin, stabilize bank liability costs, enhance the soundness of bank operations, and create space for further reducing the financing costs of the real economy.

Reduce the savings propensity of enterprises and residents.The reduction in deposit interest rates directly leads to a decrease in deposit income, among which the reduction in time deposit interest rates is relatively large. 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, reducing the savings propensity of enterprises and residents.

3. Outlook: A new round of stable growth cycle is expected to begin

The focus of monetary policy has returned to stabilizing growth and employment, and lowering the reserve requirement ratio and interest rates as well as expanding credit are still on the way.Although monetary policy faces multiple constraints such as stabilizing growth, stabilizing employment, preventing risks, and stabilizing exchange rates. However, stabilizing growth and stabilizing employment always come first, and exchange rates and long-term bond interest rates are ultimately determined by economic fundamentals. The lesson of abandoning the fundamentals for the sake of the trivial is the Southeast Asian currency crisis in 1998. At present, the world is opening a new round of interest rate cuts. The central banks of major countries are taking the lead in their monetary policies, focusing on stabilizing the domestic economy and employment, reducing the reserve requirement ratio and interest rates, and reducing the interest rates of existing mortgage loans. When the economy recovers, the exchange rate and interest rate will naturally return to the normal range.

It is still necessary to continue to lower the interest rates on existing mortgage loans.With the implementation of the 517 real estate policy, the lower limit of mortgage interest rates in many cities has been cancelled, and mortgage interest rates have entered the "3 era". According to the Shell Research Institute, the average mainstream first mortgage interest rate in 100 cities in May 2024 was 3.45%, a decrease of 12bp from April; the average mainstream second mortgage interest rate was 3.90%, a decrease of 26bp from April. However, some existing mortgage interest rates are still around 4%, and the interest rate spread between new loans and existing loans has widened, which has invisibly increased the loan pressure of residents. Early loan repayment has increased, and some have even transferred loans. It is still necessary to promote the reduction of existing mortgage interest rates.

To ease the pressure on banks' net interest margin, deposit rates were further lowered.With the opening of this round of interest rate cuts, the monetary policy transmission channels will be unblocked and the downward trend in policy interest rates will also be transmitted to deposit rates. Some large state-owned banks have said they are considering lowering their deposit listing rates, and small and medium-sized banks will follow suit.

This interest rate cut is the starting point, and is expected to usher in a new round of interest rate cuts and a steady growth cycle. The Third Plenary Session of the 18th CPC Central Committee emphasized the unswerving realization of the annual economic and social development goals.The 5% economic growth in the first half of the year was basically supported by exports and manufacturing investment. In the future, as the US economy turns from overheating to recession, coupled with the tariff and trade barriers raised by the US election, external demand is facing downward pressure. We must use the current precious time window to stimulate domestic demand and make advance preparations. The current 10bp interest rate cut is still weak. The future combination of measures to stabilize growth includes lowering the reserve requirement ratio and interest rates, the central bank's purchase of government bonds, accelerating fiscal efforts, fully lifting real estate purchase restrictions, and increasing storage efforts.

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