Source: Broker China
Author: Chen Shuyu
Regarding this downgrade, here is an explanation of the public offering!
On January 24, the People's Bank of China announced that it will lower the deposit reserve ratio by 0.5 percentage points on February 5 to provide long-term liquidity to the market by about 1 trillion yuan. At the same time, on January 25, it will lower the small refinancing and rediscount interest rate for agricultural support by 0.25 percentage points.
After the information was released, the yield on major interbank interest rate bonds plummeted, and the yield on 10-year treasury bonds fell 1.35 BP to 2.49; the Hang Seng Index rose and then rebounded. According to market participants, this represents market recognition to a certain extent.
Subsequently, a number of public funds made an urgent interpretation, believing that the time and magnitude of the central bank's current downgrade had exceeded market expectations, sending a strong positive signal and fully demonstrating the determination of monetary policy to cooperate with fiscal strength and support economic growth. At the same time, the timely introduction of monetary policy is also conducive to stabilizing confidence in the capital market, and the cost performance ratio of equity assets will be further highlighted.
Both the time and magnitude of the downgrade exceeded market expectations
“This downgrade is like a 'timely rain'. It has exceeded expectations in terms of timing and magnitude. It is conducive to stabilizing confidence in the capital market, improving market expectations, and helping the economy recover.” Dacheng Fund said that the 50BP downgrade is the largest in the past two years. It will provide the market with long-term liquidity of about 1 trillion yuan, reduce bank capital costs, and at the same time, in conjunction with structural interest rate cuts (agricultural support, small reloans, rediscount interest rates reduced from 2% to 1.75%), which will help drive the decline in LPR. On the one hand, it will help reduce the actual costs of enterprises, and on the other hand, it will also help reduce the pressure on residents' debt and boost economic vitality.
Hongde Fund said that the time and magnitude of this downgrade have exceeded market expectations. At the beginning of January, the market expected that the central bank would cut interest rates, but after the MLF on January 15 and the 1-year and 5-year LPR remained unchanged on January 22, the market's expectations of interest rate cuts have fallen short. Now the central bank has suddenly announced a reduction in the deposit reserve ratio by 50BP, once again rekindling the market's expectations for monetary policy. The central bank's downgrade has exceeded expectations at this time, which is expected to help the economy recover for the better, boost market confidence, and ease pessimism.
According to an analysis by the Agricultural Bank Foreign Exchange Fund, on the one hand, the current interest rate cut is aimed at solving the problem of insufficient effective demand and supporting economic recovery. Judging from the latest macroeconomic data, insufficient effective demand is still a limiting factor. Real estate sales have weakened after phased improvements, and economic recovery still requires policy support. Capital market fluctuations also require stable policy support. The central bank downgraded 0.5 percentage points and is expected to provide the market with long-term liquidity of about 1 trillion yuan. The reduction is the biggest in the past two years. At the same time, the current reduction in agricultural support small reloans and rediscount interest rates by 0.25 percentage points also shows that the policy is being further strengthened in terms of targeting and structure.
On the other hand, this interest rate cut fully demonstrates the determination of monetary policy to cooperate with fiscal strength and support economic growth. The downgrade provides long money, supplements basic liquidity, achieves a smooth transition, reduces bank capital costs, and at the same time reduces structural interest rates, and jointly guides the further reduction of financing costs for entities. As monetary policy attitudes become more clear, liquidity will remain relatively abundant in 2024, and MLF interest rates and LPR are expected to be lowered appropriately in the future.
What signal is it releasing?
The Bosch Fund said that the downgrade is one of the monetary policy measures to deal with insufficient economic demand. Considering the current economic and corporate profit situation, the market has strong expectations for monetary policy easing in the near future. This downgrade is conducive to stabilizing market expectations for monetary policy, reducing financing costs for financial institutions and the real economy, and stabilizing the capital market.
Cathay Pacific Fund believes that the central bank's interest rate cut has the following considerations:
First, implement the arrangements of the Central Economic Work Conference to create a reasonable and abundant liquidity environment for credit investment and financial institutions. The first quarter was the peak of traditional credit investment. Banks faced heavy pressure across the Spring Festival in February. By drastically reducing medium- to long-term liquidity investment, the People's Bank of China can maintain reasonable and abundant interbank liquidity. In terms of volume, this 0.5% reduction exceeded expectations, breaking the practice of a slight downgrade of 25BP since 2022.
Second, the high-quality development of the real economy of financial services reflects the political and popular nature of finance. After interest rate cuts, interest rates on long-term agricultural support for small reloans and rediscounts were 1.75%, which was once again unified with interest rates on structured monetary policy instruments. By cutting interest rates, the People's Bank of China encourages financial institutions to provide more loans to policy support areas such as agriculture and small and micro enterprises. This helps financial institutions to better serve the real economy, especially during the economic recovery phase.
Third, stabilizing bank interest spreads, downgrading and replacing MLF, and lowering interest rates on structured monetary policy instruments can all reduce bank debt costs. According to data disclosed by the State Financial Supervisory Authority, the net interest spread of commercial banks at the end of the third quarter was 1.73%, down 17BP from the end of last year.
Fourth, the shift in overseas monetary policy has opened up policy space for our country. The central bank said that in 2024, the spillover effects of monetary policy in developed economies will develop in the direction of reducing pressure, and the difference in monetary policy cycles between China and the US will tend to subside. This change in the external environment is objectively conducive to enhancing the autonomy of China's monetary policy operations and broadening the space for monetary policy.
Fifth, stabilize the stock market. Recently, the domestic equity market has fluctuated greatly. The People's Bank of China has also made it clear that it will strengthen countercyclical and cross-cyclical adjustment of monetary policy instruments, focus on stabilizing the market and stabilizing confidence, and create a favorable monetary policy environment for the operation of financial markets, including the capital market.
CITIC Prudential Fund believes that “interest rate reduction” at this time has the following purposes: First, to guide LPR to continue to decline and strengthen the effectiveness of credit support entities. Due to bank interest spreads, LPR quotes did not decline in January, and the beginning of the year was the peak of credit investment. At this time, bank debt-side costs were further reduced through these measures, which helped credit grow faster; second, the Spring Festival was a period where the liquidity of the banking system was tight, and residents had a high demand for cash. At this time, investing long-term capital through downgrades helped calm capital fluctuations around the Spring Festival and stabilize the liquidity of the financial market at the end of the year; Third, the recent capital market fluctuated greatly, and society was calling for strong measures at the policy level. Policies are also in response to market concerns.
Tongtai Fund said that the central bank's move beyond expectations has sent three signals:
(1) Reduce corporate financing costs: After the downgrade, the available capital of commercial banks increased, and the supply capacity of the loan market increased. It also helps reduce the capital costs of financial institutions and further reduces the financing costs of enterprises.
(2) Stabilize the financial market: In the current context of increasing global economic uncertainty, the downgrade helps to increase market confidence; it is also beneficial to ease the tight liquidity situation in the financial market and maintain the stability of the financial market.
(3) Promote economic restructuring: By releasing liquidity, financial institutions are guided to increase their support for the real economy, especially for small, micro, and private enterprises; it helps promote the optimization and upgrading of the economic structure.
Many public offerings are optimistic about the medium- to long-term performance of the equity market
Looking ahead to the future market, many public investors believe that the equity market's mid-term performance is worth looking forward to.
Bosch Fund said that the subsequent development of the stock market depends more on the futures market and its delivery situation, as well as progress in capacity control and digestion in some industries. Looking at the medium term, both of these issues will be solved. Combined with the current valuation position of the market, we are optimistic about the mid-term performance of the market.
Dacheng Foundation believes that looking ahead, with the future shift in the Federal Reserve's monetary policy, it will objectively help expand domestic monetary policy space, and fiscal policy will also be moderately coordinated to resolve the current problems of insufficient effective domestic demand and weak social expectations. As far as the equity market is concerned, confidence will be restored, and the market is expected to pick up significantly.
According to Hongde Fund's analysis, domestic market liquidity is expected to remain reasonable and abundant in the future, and the central bank may still moderately guide market interest rates downward, which will help repair stock market valuations.
The Great Wall Fund believes that positive policy changes are expected to break negative financial feedback, and the market is expected to gradually recover from the bottom. After adjusting for the sharp decline, sectors that have surpassed the previous period, have industrial catalysts, and are expected to exceed expectations are worth paying attention to, such as AI core hardware, MR, semiconductors, brokerage firms, etc.
The Agricultural Bank Foreign Exchange Fund said that structurally, the short-term proposal focuses on the high-dividend sector in the early stages of economic recovery and the direction of high-tech growth benefiting from industry trends. On the one hand, considering that the domestic economy and corporate profits have just entered the recovery stage, and overseas liquidity has not been completely relaxed, the superposition of the Hershey Economic Recovery Index can also often bring absolute returns. The high-dividend sector still has medium- to long-term bottom position allocation value, focusing on coal, banks, petroleum and petrochemicals, operators, electricity, transportation, etc.
On the other hand, the downgrade will better support key areas and weak links, especially technology-based enterprises driven by strong national policy support and industrial trends in recent years. In the medium to long term, the direction of technological growth has potential for growth. Product breakthroughs and innovations enhance performance, and growth flexibility is high. It is recommended to focus on AI+, robotics, intelligent driving, satellite internet, consumer electronics, etc.
Morgan Asset Management believes that judging from the peripheral environment and profit fundamentals of listed companies, there has been a certain improvement compared to last year. The market was relatively volatile in the early stages. The first quarter was in an empty financial window, and corporate profits have not yet been realized; the market is looking forward to new favorable policies in the new year. The People's Bank of China's forecast downgrade and precise interest rate cuts this time is to implement the Central Economic Work Conference's policy of “being flexible, moderate, accurate and effective to promote a steady decline in comprehensive social financing costs”. Second, it can ease the slightly tight liquidity before the traditional Lunar New Year, and is also expected to push capital interest rates to converge to policy interest rates, and then combine fiscal policy coordination to support credit growth and consolidate and enhance the positive trend of economic recovery. It is expected that profits in more industry sectors will gradually increase, and China's assets may usher in an upward opportunity.
The Finance Fund said that the continuation or intensity of the rebound in the future may also require attention to whether relevant policies will continue to be introduced, including policies to stabilize the economy and confidence, support and resolution in some risk areas, etc., which will have a big impact on the future market.