Recently, the market has been calling for the PBOC to cut interest rates due to the high real interest rate. We believe that the reasons why the PBOC has not cut interest rates for the time being may be as follows: First, it is necessary to maintain the basic stability of the RMB exchange rate; Second, the bank's net interest margin is at a historical low; Third, the first quarter saw a good economic start, and the current price downturn is mainly structural and phased. From the perspective of liquidity, the increase of residents' savings and the trend of deposit periodization are obvious, which also reflects the need to continue to guide the downward trend of interest rates, so as to make the real interest rate and the expected investment income more matched, improve expectations and expand the total social demand. At the meeting of the Political Bureau of the CPC Central Committee held at the end of April, it was pointed out that "we should flexibly use policy tools such as interest rates and deposit reserves, increase support for the real economy, and reduce the cost of comprehensive social financing". Historically, after the central government made similar statements, relevant policies will probably be implemented in the next few months. In many ways, the need for interest rate and reserve ratio cuts is also increasing. First, the recovery of aggregate demand still needs policies. As an important aggregate policy, interest rates play an important role in expanding aggregate social demand. II. The interest burden on existing debt is still heavy, and the monetary policy remains supportive, which will help reduce the pressure on debt entities to repay their principal and interest, improve their cash flow, and reduce debt risks. Third, the basic stability of the RMB exchange rate depends on reasonable economic growth expectations. The interest rate policy will help inflation recover moderately and improve market expectations, which will lay a solid foundation for the basic stability of the RMB exchange rate.
Why doesn't the People's Bank of China continue to cut interest rates?
Since the second quarter of 2023, the inflation data has remained at a low level. In June and August 2023, the PBC cut the MLF interest rate twice, a total of 25 basis points. In 2024, the inflation at a low level still shows no obvious signs of improvement. The PBC clearly stated that it would "take maintaining price stability and promoting a moderate recovery of prices as an important consideration of monetary policy". The PBC cut the RRR by 50 basis points in February, and guided the LPR of more than five years to decline by 0.25 percentage points, but did not continue to cut the policy interest rate. Recently, the market has heard more and more calls for the PBC to cut the policy interest rate because the real interest rate is too high.
We believe that the reasons why the PBOC has not cut interest rates for the time being may be as follows: First, it is necessary to maintain the basic stability of the RMB exchange rate. In the first quarter of 2024, the US employment and inflation data comprehensively exceeded expectations. In April, although the inflation and employment data slightly weakened, they still showed strong resilience. The Federal Reserve officials' tone was also hawkish, which made the market's expectations for the rate cut of the Federal Reserve this year have been greatly weakened, driving the US bond interest rate to rise significantly, Since the beginning of the year, the yield of 10-year US Treasury bonds has risen by nearly 50 basis points, and the spread with the yield of Chinese government bonds of the same period has further expanded to more than 200 basis points, which has put pressure on the RMB exchange rate. Since the beginning of the year, the exchange rate of the US dollar against the RMB has still appreciated by about 2%. The People's Bank of China may be worried that if the policy interest rate continues to be cut while the US dollar interest rate remains high, it may further aggravate the inverted interest rate gap between China and the United States and increase the pressure on RMB exchange rate depreciation.
Second, the bank's net interest margin is at a historical low, and there is limited space for active interest concessions. According to the data of the National Monetary Authority, in the fourth quarter of 2023, the net interest margin of commercial banks has fallen to 1.69%, which has been at a historical low, and has also fallen below the 1.8% warning line specified in the Implementation Measures for Qualified Prudential Assessment (Revised Version 2023). The main debt cost of banks still comes from deposits. Considering that the net interest margin of banks has been at a low level, if we continue to guide the reduction of loan interest rates, we may need to reduce deposit interest rates in a new round. However, after several rounds of cuts, the deposit interest rate has been low at present, and the affordability of the residential sector needs to be taken into account for the continuous reduction of deposit interest rate in the short term.
Third, the first quarter saw a good economic start. In the first quarter of 2024, GDP grew 5.3% year on year, exceeding expectations. The People's Bank of China believes that a series of monetary policies introduced earlier are gradually playing a role, and the national economy continues to recover. At the same time, recent real estate support policies have been significantly upgraded, which is expected to improve demand in the future. In addition, the People's Bank of China believes that the root cause of the current price downturn is insufficient demand and imbalance between supply and demand of the real economy, rather than insufficient money supply; The People's Bank of China has judged that with the continuous improvement of China's economy, the aggregate demand will expand, and the subsequent price recovery will still have a foundation. In addition, the People's Bank of China also said that in the process of transformation and upgrading of economic structure, transformation of new and old drivers and solid promotion of high-quality development, the differentiation of economic and financial indicators in different fields will be significantly increased, and the real interest rates felt by different industries and enterprises are different. For example, for service industries such as culture and entertainment and new drivers, prices are still rising, The perceived real interest rate is relatively low; For industries in the downward cycle, such as real estate, the real interest rate is relatively high. The People's Bank of China also said that it is necessary to prevent the interest rate from being too low to reduce the power of structural adjustment, which will lead to increased internal competitive momentum or capital idling, further reducing prices and falling into a negative cycle.
Where has liquidity gone?
According to the PBC's monetary policy report for the first quarter of 2024, China's current loan balance is nearly 250 trillion yuan and deposit balance is nearly 300 trillion yuan. In terms of loans, by sector, by the end of the first quarter of 2024, the loan balances of enterprises, institutions and households were 163 trillion yuan and 81 trillion yuan, respectively, accounting for 66% and 33% of the total loan balances; In terms of period and industry, at present, medium and long-term loans account for more than two-thirds, heavy asset industries such as infrastructure, real estate and manufacturing account for about 50%, and residents' non housing consumption loans account for less than 10%. It can be seen that the investment of Chinese loans is mainly used to support enterprises to expand reproduction and financing in the field of investment, and there are few consumer end loans for residents' non housing.
In terms of deposits, residents, enterprises and government accounted for 49%, 27% and 14% respectively, up 7.1, down 4.2 and down 3.3 percentage points respectively from 2019 before the epidemic, which also corresponded to weak consumption at the residential end. At the same time, the trend of fixed deposits is intensifying, and the proportion of fixed and demand deposits has changed from 6:4 in 2017 to 7:3 at present. We believe that the main reason for the rise of residents' deposits is that they are still cautious about future expectations, leading to an increase in preventive savings; In addition, the decline in expected returns of various investment products, or even thunder, has also brought about changes in residents' risk preferences, which is also one of the reasons for the increase in residents' deposits.
The probability of interest rate reduction within the year is still high
At the meeting of the Political Bureau of the CPC Central Committee held at the end of April, it was pointed out that "we should flexibly use policy tools such as interest rates and deposit reserves, increase support for the real economy, and reduce the cost of comprehensive social financing". Historically, after the central government made similar statements, the probable rate of interest rate and reserve ratio cuts will be implemented in the next few months. In many ways, the need for interest rate and reserve ratio cuts is also increasing.
First, the recovery of aggregate demand still needs policy efforts. After the epidemic, the recovery of China's production side was significantly better than that of the demand side. According to the data in April, the demand side still needs further improvement. Although fiscal policies play a greater role in expanding total demand, interest rates, as an important aggregate policy, also play an important role in expanding total social demand. By lowering the policy interest rate, in coordination with the new round of deposit interest rate reduction, we will continue to reduce the social financing cost on the basis of maintaining the basic stability of the bank's net interest margin, so as to make the actual interest rate and the expected investment income more matched, and promote the expected return of risky assets and risk-free assets more matched, which is also expected to drive the transformation of some deposit funds and improve the overall social demand, Provide a good monetary and financial environment for economic recovery.
2. The interest burden on outstanding debt is still heavy. In the context of steadily defusing debt risks, monetary policy remains supportive, which helps reduce the pressure on debt entities to repay their principal and interest, improve their cash flow and reduce debt risks. At present, the debt problem in urban investment and real estate is still serious, and their asset side returns have dropped significantly. By continuing to reduce the interest rate of outstanding debt, it will help reduce the burden of these debt entities, make their debt side costs and asset side returns more matched, enhance their ability to continue operations, and reduce debt risks. At the same time, the weakness of real estate sales also exceeded expectations, which was due to the slowdown of urbanization scale, as well as the large deviation between rental yield and housing loan interest rate. Driving the housing loan interest rate down further is expected to release some rigid demand and improve the overall social demand.
Third, the basic stability of the RMB exchange rate depends on reasonable economic growth expectations. The interest rate inversion between China and the United States is an important factor affecting the RMB exchange rate, but the market's expectation of China's economic growth is also a key factor affecting the RMB exchange rate. The interest rate policy will help the moderate recovery of inflation and improve market expectations, which will lay a solid foundation for the basic stability of the RMB exchange rate. In addition, in the second quarter, the US employment and inflation data showed signs of weakening. The Federal Reserve is still expected to cut interest rates 1-2 times in 2024, which is also expected to ease the pressure on the RMB exchange rate and open space for the PBOC to cut interest rates.
