LPR interest rate cut boots landed, and the unexpected decline further opened up room for the real economy to make profits.
On February 20th, the People’s Bank of China authorized the National Interbank Funding Center to announce the new loan market quotation rate (LPR), showing that the one-year LPR was 3.45%, which was the same as the previous period. The LPR over five years was 3.95%, down 25 basis points from the previous period. Overall, this downward adjustment is within the expectation, but the extent exceeds the market expectation, which is the biggest historical decline of LPR over five years.
Relevant analysis pointed out that the significance of interest rate reduction lies not only in short-term economic stimulus, but also in laying the foundation for medium and long-term economic development. By reducing the cost of loans, it will help to guide the flow of funds to the real economy, especially the manufacturing industry and industries focusing on scientific and technological innovation, thus promoting the high-quality development of China’s economy. After the sharp interest rate cut, a series of supporting policies are expected to keep up to further promote the development of the real economy. It is expected that LPR will still have room for decline in the future.
Asymmetric interest rate cut
LPR is the quoted interest rate in the loan market. Since the reform in August 2019, LPR has been quoted by all quotation banks on the 20th of each month (postponed in case of holidays) by adding points to the open market operating interest rate (mainly referring to the medium-term lending convenience MLF interest rate), that is, "LPR=MLF interest rate+spread".
However, judging from this interest rate cut, MLF has not moved, while LPR has been lowered separately. It is reported that on February 18th, the People’s Bank of China launched a 105 billion yuan open market reverse repurchase operation and a 500 billion yuan medium-term lending facility (MLF) operation. The 7-day reverse repurchase rate and the 1-year MLF rate were 1.80% and 2.50% respectively, which remained unchanged from the previous period.
Some insiders pointed out that the MLF-LPR linkage mechanism does not mean that the two need to be adjusted equally. The downward adjustment of LPR means that the transmission path of monetary policy has undergone important changes, and the relationship between LPR and MLF will be further diluted in the future.
In this regard, the chief economist of CITIC Securities clearly pointed out that compared with the MLF interest rate, whether the financing cost of the real economy can be reduced is more important for economic growth, and the actual indication of LPR is stronger in this respect. At the same time, whether LPR can decline depends on whether the bank’s capital cost can go down, and the deposit cost is an important factor affecting the bank’s capital cost. Since 2022, the deposit interest rate has been lowered four times, further opening up the space for LPR to go down and banks to make profits.
The macro Li Chao team of Zheshang Securities also believes that under the current mechanism of "market interest rate+central bank guidance →LPR→ loan interest rate", comprehensive RRR reduction and targeted interest rate reduction will help promote the downward trend of LPR, which will be further transmitted to the reduction of financing costs in the real sector.
Reduce costs for the real economy
"The significance of interest rate cuts lies not only in short-term economic stimulus, but also in laying the foundation for medium and long-term economic development. By reducing the cost of loans, it will help guide the flow of funds to the real economy, especially the manufacturing industry and industries dominated by technological innovation, thus promoting the high-quality development of China’s economy. " Zhu Keli, executive director of China Information Association and founding president of National Research Institute of New Economy, told beijing business today.
Zhu Keli pointed out that, first of all, interest rate cuts will reduce the financing cost of enterprises, so that enterprises can obtain funds at a lower cost, which will help expand the scale of production and enhance market competitiveness. Especially for capital-intensive industries such as manufacturing and high-tech industries, interest rate cuts will directly enhance their profitability. Secondly, the interest rate cut will also promote the R&D investment of enterprises. Scientific and technological innovation is an important driving force of economic development, but R&D investment often needs a lot of financial support. Interest rate cuts will enable enterprises to obtain R&D funds at a lower cost, thus promoting the development of scientific and technological innovation. At the same time, interest rate cuts will also promote market liquidity. With the reduction of loan cost, the liquidity of the market will be improved, which will help the stable operation of the market and provide a better market environment for enterprises.
It is worth noting that previously, the People’s Bank of China decided to reduce the deposit reserve ratio of financial institutions by 0.5 percentage points from February 5 (excluding financial institutions that have implemented the 5% deposit reserve ratio). After the reduction, the weighted average deposit reserve ratio of financial institutions is about 7.0%; Since January 25, 2024, the interest rates of agricultural refinancing, small-scale refinancing and rediscount will be lowered by 0.25 percentage points respectively.
At that time, Peng Wensheng, the chief economist of CICC, said that the interest rate cut of bank deposits in the early stage of loose money superposition was paving the way for the downward trend of LPR, expanding the space for making profits to entities, and helping to stabilize growth, expectations and the market. In the downward phase of the financial cycle, demand is weak, and "tight credit" needs "loose money" and "wide finance" to hedge, and it is expected that monetary policy will continue to remain loose. In order to give full play to the policy effect more effectively, it is also necessary to gradually transfer money from credit to finance, and it is worth looking forward to the generalized financial afterburner.
Getting through the "last mile" of loans is the key
"From the current economic situation and policy orientation, it is expected that LPR will still have room for decline in the future." Zhu Keli said: on the one hand, the uncertainty of the global economic environment still exists, and the pressure of domestic economic restructuring is also great, which requires monetary policy to continue to play a countercyclical role; On the other hand, the easing of inflationary pressure and the improvement of market liquidity also provide conditions for the further decline of LPR.
However, Zhu Keli also pointed out that the downward space of LPR will also be restricted by multiple factors. First of all, the bank’s capital cost is an important consideration. If the bank’s capital cost is too high, even if the LPR drops, the bank may not be able to fully transmit this policy effect by lowering the loan interest rate. Secondly, inflation expectation is also an important factor. If inflation expectation rises, the central bank may raise interest rates to curb inflation. It is expected that LPR will show a steady and declining trend in the future, but the extent and speed of decline will be affected by many factors.
Yang Delong, chief economist of Qianhai Open Source Fund, told beijing business today that the government may also adopt a series of supporting policies to further promote the development of the real economy after a sharp interest rate cut. The key is to get through the "last mile" of loans to enterprises, especially to give more support to small and medium-sized enterprises.
Bai Wenxi, vice chairman of China Enterprise Capital Alliance, further pointed out that in the future, it may increase financial support, increase financial deficit ratio or issue special government bonds to provide financial support for infrastructure construction, scientific and technological innovation and other fields; Implement the policy of tax reduction and fee reduction to reduce the tax burden of enterprises and increase the profit space of enterprises; Strengthen the coordination of financial supervision, optimize the credit structure, and ensure that funds flow to the real economy; Promote capital market reform, increase the proportion of direct financing, and provide more financing channels for entity enterprises.
Beijing business today reporter Fang Binnan Cheng Liang