On June 14th, the People's Bank of China released May financial statistics, showing that RMB loans increased by 950 billion yuan during the month, and the scale of social financing increased by 2.06 trillion yuan, both of which were lower than the same period last year, but still in line with market expectations. At the end of May, the year-on-year growth rate of M2 was 7.0%, while the year-on-year growth rate of M1 was down 4.2%.

Market experts generally believe that the total amount of financing in May has steadily increased, and the interest rate level has remained low. Although the growth rate of credit is still affected by the high base of credit last year and some short-term disturbance factors, the rhythm is more balanced, the effect of credit growth“ squeezing water” is apparent, and the actual financial support for the real economy has not decreased.

Overall, financing under the financial 'water squeezing effect' remained stable in May.

Preliminary statistics show that in the first five months of this year, the cumulative increase in the scale of social financing was 14.8 trillion yuan, which is 2.52 trillion yuan less than the same period last year. At the end of May, the year-on-year growth rate of the scale of social financing was 8.4%, still significantly higher than the nominal economic growth rate, reflecting the firm support of finance for the real economy.

Some analysts have pointed out that the pace of enterprise and government bond issuance has accelerated recently, providing a stable support for the growth rate of social financing, and to a certain extent, reflects the accelerating implementation of fiscal policy and the continuous optimization of the structure of the scale of social financing.

As the "big head" that contributes to the increase in social financing, the scale of new RMB loans in May basically met market expectations. Reporters learned from authoritative sources that financial institutions, although still lack sufficient demand reserves for credit investment, and with the optimization of quarterly GDP accounting methods, the phenomenon of local government supervision exaggerating deposits and loans has been alleviated. "Against this background, the new loans in May are still close to the trillion yuan level and are not considered low."

Another short-term factor that cannot be ignored in the growth of new RMB loans in May is the stopping of "manual interest rate supplement," which still has an impact on the financial data squeezing effect.

Recently, the national market rate pricing self-discipline mechanism issued a "Proposal on Prohibiting the Initiative of Manual Interest Rate Supplement to Maintain the Orderly Competition of the Deposit Market" (hereinafter referred to as the "Proposal") to regulate the bank's manual interest rate supplement behavior. Reporters learned from bank insiders that before the regulation of manual interest rate supplement, the range of illegal interest rate supplement was about 10-100 basis points, and the proportion of illegal interest rate supplement amount accounted for about 70% of the total expenditure of this type of deposit interest.

"After the ban on illegal manual interest rate supplement, the bank deposit interest rate will be slightly reduced, and the pressure on the bank's liability side caused by the high cost of corporate deposits and the regularity of deposit-taking will also be reduced. At the same time, the policy of reducing deposit interest rates before will also be further released, enhancing the sustainability of the bank's lending to the real economy." The above-mentioned bank insiders said.

Data shows that the weighted average interest rate for new enterprise loans issued in May was 3.71%, a decrease of 6 basis points from the previous month; the interest rate for new personal housing loans was 3.64%, a decrease of 6 basis points from the previous month, both of which were at a historical low.

In addition, industry insiders also pointed out that local bonds and the disposal of risks of small and medium-sized financial institutions have a downward effect on new loans in May. If these factors are restored, the new loans added during the month are actually higher than the year-ago levels.

"Overall, the current financial support is obviously greater, and the policy effect will continue to be evident." The above-mentioned industry insiders stated that the central bank's guidance to commercial banks to tap credit demand and strengthen the regulation of manual interest rate supplement is intended to guide banks to achieve balanced development in terms of scale, quality, and efficiency, optimize the allocation of financial resources after squeezing out the water, and enhance the sustainability of lending to the real economy.

Lian Ping, the dean of Guangfa Securities Research Institute, said that the current monetary and credit growth rate meets the needs of China's economic operation. What needs to be done next is to balance the allocation of credit resources throughout the year to avoid excessive concentration or shortage at certain times. Galaxy Securities chief economist Zhang Jun said that the impact of financial institutions' performance growth has been further weakened, and the fluctuations in traditional loans in large and small months will be partially smoothed out.

The three main reasons for the slight slowdown in M2 growth rate in May

At the end of May, the balance of M2 increased by 7% year-on-year. Authoritative sources stated that the slowdown in the growth rate of M2 is the result of the comprehensive effects of multiple factors, which mainly include the following three aspects:

First, the disturbance of the high base last year. In 2023, it was the first year after the steady turning point of the epidemic. The policy support was strong, and the growth rate of M2 increased significantly, which will lead to a decline in the high base. The data shows that the year-on-year growth rate of M2 in May 2023 was as high as 11.6%, and the stock of M2 had exceeded 300 trillion yuan. It is difficult to expect that the total amount of money will maintain a high double-digit growth rate.

Second, the active workout under the stage of high-quality development. The regulation of manual interest rate supplement and the optimization of the calculation of the value-added of the financial industry since this year are essentially s to actively work out the excessive water in the monetary and financial data, which will lead to a decrease in the growth rate of M2.

Third, the impact of phase factors. In May, the scale of corporate and government bond issuance increased significantly, with an increase of nearly 900 billion yuan year-on-year. Some enterprises are still repaying loans ahead of schedule under the influence of banking deposit and loan crowding out, which also has a downward effect on credit growth. Especially, the recently issued special treasury bonds have the characteristics of higher yield than deposits, stronger liquidity and relatively small risks. They have been favored by institutions and individual investors. Through purchasing wealth management products and other channels, a large amount of deposits of residents and enterprises flowed into the bond market, which has certain impact on M2. Wind data shows that in the first five months of this year, the size of bond fund assets increased by 492.1 billion yuan, while it was only 73.2 billion yuan in the same period last year. Products with a size of 100-300 billion yuan generated operating income of 40.1/128.8/0.6 billion yuan, respectively.

We should de-emphasize our attention on financial aggregate indicators.

As of the end of May, the M2 balance exceeded the 30.1 trillion yuan threshold, and the stock of social financing reached more than 39.1 trillion yuan, while the balance of on-and off- balance sheet loans in domestic and foreign currencies exceeded 25.3 trillion yuan. Faced with the huge stock base, authoritative experts believe that the change of financial stock data should not be measured by the way of increasing year by year.

According to the above-mentioned person, GDP, consumption, investment and other economic indicators are flow concepts, while common financial indicators such as M2 and the stock of social financing, RMB loan balance, etc. are stock concepts. They are the total sum of net increase, which deducts due amounts of the past accumulated flow. The financial stock takes into account the results of financial resources continuing to be invested after the expiration. The previous flow resources can still play a supporting effect on the real economy after multiple and repeated use, while economic flow indicators statistically measure only one-off activities, which has obvious differences between these two concepts.

"If we require that the financial stock increase year-on-year, we are actually comparing the net increase during one period of time with the net increases in other periods, which is an increase based on an already higher base," said the above-mentioned person.

Industry insiders also generally believe that it is necessary for the central bank to de-emphasize the comparison of financial stock year-on-year. This comparison method is not easy to understand and is not accurate enough to measure the effectiveness of financial support for the real economy. China's monetary credit is shifting from extensive expansion to intensive development. Economic structural adjustment and transformation and upgrading have brought about a shift in credit demand. The loan growth rate will naturally have a process of gear shifting. In the long run, the correlation between financial scale indicators and China's economic development is gradually weakening.

"China has long paid close attention to the total financial indicators such as money supply and credit, and the underlying assumption is that they are highly correlated with economic growth. In fact, with the deepening of finance and the transformation of economic structure, this correlation is weakening. In history, major developed economies have focused on similar aggregate indicators, but with the intensification of financial detachment, they have gradually de-emphasized and abandoned tracking these indicators," said industry insiders.

The above-mentioned authoritative person said that the future policy direction will pay more attention to revitalizing stock capital and retrieving low-efficiency loans for investment in new kinetic energy areas, which will see practical effects in aspects such as the increase and decrease in credit structure. It should be noted that revitalizing stock will inject new kinetic energy into the economy, but it will not be reflected in the amount of loans approved. Objectively speaking, monetary growth will slow down, but it does not mean that the central bank subjectively intends to tighten credit.

Further rate cuts are facing internal and external "double constraints."

Since the beginning of this year, the appropriate level of the current interest rate has been the focus of market attention. Data shows that the interest rates of newly issued corporate loans and personal housing loans in May were around 3.7% and 3.6%, respectively, down by 0.2 and 0.5 percentage points year-on-year, and they have been at a historical low.

Industry insiders believe that neutral interest rate is an angle to measure the level of interest rates. Neutral interest rate belongs to the real interest rate, which is a theoretical standard for evaluating the monetary policy stance. If the real policy interest rate after deducting the inflation factor is lower than the neutral interest rate, it indicates that the monetary policy support is strong.

Neutral interest rate, also known as natural interest rate, refers to the level of interest rate at which the economy realizes potential output and target inflation. In layman's terms, it is the interest rate level under an environment where the economy is neither overheated nor too cold. Based on different hypothetical conditions, the mainstream view believes that the current neutral interest rate level in China is around 2%.

"Since the beginning of this year, the 7-day reverse repo rate of the open market operations of the central bank has remained at a low level of 1.8%. After considering the inflation factor, the current actual policy interest rate level is less than 2%, which is still lower than the neutral interest rate," said the above-mentioned industry insider. This indicates that the current policy rate in China is low, and that monetary policy support for the real economy is firm.

Recently, as central banks of many countries have started an interest rate cutting cycle, the discussion about whether the People's Bank of China will cut interest rates again has heated up. Market experts believe that there is still room for interest rate cuts, but it also faces internal and external constraints. Since the beginning of this year, the central bank has repeatedly stated that monetary policy still has room, and the previous policy effects are still showing. In the future, the central bank will continue to adjust counter-cyclically in response to changes. Objectively speaking, further rate cuts are facing internal and external "double constraints."

Specifically, from the perspective of internal factors, the net interest margin of banks continues to narrow. By the end of the first quarter, the net interest margin of China's commercial banks had fallen to 1.54%. Profit is an important source of supplementary capital for banks. The continuous shrinkage of net interest margin will affect the ability of banks to sustainably serve the real economy.

"Guiding the decline of deposit interest rates can moderately slow down the rate of narrowing of the net interest margin of banks. However, it will also affect consumption on the part of residents and prevent unsound behaviors such as manually supplementing interest rates." The above-mentioned expert said that, in fact, under the background of regulated banks' supplementing of interest, the originally artificially inflated deposit interest rate will return to normal, that is, the decline in interest rates on deposits. Coupled with the factors of the pricing reset of outstanding time deposits after maturity, the effect of the previous downward trend in deposit interest rates is still showing.

From an external perspective, the exchange rates of the Chinese yuan also need to be considered. Since 2023, the continuous inversion of interest rates between China and the United States has put pressure on the devaluation of the Chinese yuan. Currently, the interest rate gap between China and the United States has reached 220 basis points, and it is not easy for the yuan to maintain a exchange rate of around 7.2 against the US dollar. Interest rate adjustments also need to consider their impact on exchange rates.