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Haiyin Research Institute Hot Topics Quick Review: The central bank cut interest rates beyond expectations once again opens up space for monetary easing

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Hywin wrote a column · May 22, 2022 22:18
Haiyin Research Institute Hot Topics Quick Review: The central bank cut interest rates beyond expectations once again opens up space for monetary easing
Summary:
The central bank exceeded expectations and lowered LPR quotes for varieties with a term of 5 years or more
Releasing a signal of stable real estate, real estate can continue to be watched in the medium term
There is still room for further relaxation in the future
Background of the incident:
On May 20, the central bank announced the latest 1-year LPR report of 3.70%. The last time was 3.70%, the LPR report for varieties with a term of 5 years or more was 4.45%, and the last time was 4.60%.
Chart 1. The central bank's 5-year LPR price fell again
Haiyin Research Institute Hot Topics Quick Review: The central bank cut interest rates beyond expectations once again opens up space for monetary easing
Data sources: Wind, Haiyin Research Institute
Haiyin Wealth Research Institute:
The central bank's current reduction in LPR interest rates has exceeded market expectations in terms of variety and magnitude. Previously, the MLF was renewed at equal parity prices this month. As a result, the market generally believes that even if the central bank “cuts interest rates”, it will cut the 1-year term, with a range of 5-10 BP.
Why did you choose to lower interest rates for products with a term of 5 years or more?
First, it is due to the need for steady growth.This week, when holding a symposium on steady growth and stabilizing market players in 12 provinces to protect employment, the Prime Minister pointed out that since March, especially in April, some economic indicators have clearly weakened, and the downward pressure on the economy has further increased. Meanwhile, financial data released by the central bank last week showed that new RMB loans were added in April by only 645.4 billion yuan, a year-on-year decrease of 823.1 billion yuan; of these, medium- and long-term loans accounted for 31.7%, down 23 percentage points from the previous month and 47 percentage points from the same period last year. It reflects the low level of confidence among residents and businesses. Through this reduction in the 5-year LPR interest rate, it is conducive to reducing long-term financing costs, thereby stabilizing and activating the demand for medium- to long-term loans from enterprises and residents, and avoiding further strengthening pessimistic expectations.
The second is the targeted release of a signal to stabilize real estate.Various real estate data continued to bottom out in April. Among them, the sales area of new construction, construction, completion, and commercial housing decreased by 44.2%, 38.7%, 14.2%, and 39% year-on-year respectively, the biggest decline in recent years; the two major forward-looking indicators for housing companies' land acquisition area and development capital sources declined by 46.5% and 23.6%, respectively, from January to April, which means that the downward trend in real estate is still not over. Since real estate and its upstream and downstream industrial chains still account for about 40% of China's total GDP, and contribute about 40% of tax revenue. Stabilizing real estate not only helps achieve the goal of stabilizing the economy and stable employment, but also avoids the continued spread of risk. Last weekend, the central bank issued a document to lower the lower interest rate limit for residents to buy their first home mortgage. This time, it also separately lowered the 5-year LPR interest rate linked to mortgage interest rates, further releasing a signal from senior management about stabilizing real estate.
What is the impact on the market and assets?
The central bank's interest rate cut in excess of expectations has not only had a substantial effect on the real economy and capital market (stock market, bond market), but also boosted sentiment to a certain extent.
First, lower LPR interest rates will help reduce long-term financing costs and ease the financial burden on the real economy; secondly, lower interest rates will also help improve the valuation level of the stock market.
What is the room for the central bank's monetary policy in the future?
After the implementation of the central bank's interest rate cut that exceeded expectations, A-shares surged and fluctuated. None of the three major indices rose by more than 2%. Treasury bond futures operated underwater throughout the day, or reflected market concerns that “exceeded expectations,” overdrafted future monetary policy space. But we think:
First, yields on US dollars, US stocks, and US bonds have all declined markedly recently, indicating that the market may have begun trading expectations of the US recession. The Federal Reserve's hawkish monetary policy may have some variables in the future, and the restrictions on China's monetary policy will also weaken;
Second, the central bank previously stated that the primary goal of monetary policy this year is to stabilize prices. The April CPI data also showed that inflation is heating up, but as residents' income slows and spending intentions decline, there is little chance that future inflation will rise sharply; on the contrary, we need to be wary of a sharp contraction in demand;
Third, as far as the real estate market is concerned, the current average mortgage interest rate of 4.5% is comparable to the GDP growth rate, which is significantly higher than that of overseas developed countries such as the US and Japan. Against the backdrop of shifting economic growth, mortgage interest rates still need to be further lowered if residents' demand for home purchases is to be effectively stimulated.
In summary, the central bank's interest rate cut in excess of expectations is a landmark sign worth paying attention to. Under the inertial downturn in the real estate market, China is not only facing increased pressure for steady growth, but also needs to prevent the spread of risks. The central bank targeted the 5-year LPR interest rate, which is linked to mortgage interest rates, and previously implemented greater interest rate concessions for residents to buy their first home, which means stabilizing real estate will become one of the main directions of macroeconomic policy development in the next phase. However, judging from an absolute level, interest rates on housing loans are currently higher than the economic growth rate and overseas developed countries, and there is still room for further decline in LPR interest rates in the future.
Disclaimers:
Source: Liu Hua, Haiyin Research Institute
This report was produced by Haiyin Wealth Management Co., Ltd. The information in this report comes from publicly available materials and information, but Haiyin Wealth Management Limited (hereinafter referred to as “Haiyin Wealth”) does not guarantee the accuracy and completeness of this information and information. The information, opinions, etc. in this report are for investors' reference only and do not constitute bids or levies for the securities transactions described. This information or opinion does not take into account the specific investment purpose, financial situation, or specific needs of the person receiving this report, and does not constitute a personal recommendation for anyone at any time.
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