The consensus view is that the current monetary easing stance ought to continue. We believe the key point is: to what extent should easing be carried out? We consider what the market could expect.
How far should easing go?
China’s 2Q Monetary Policy Report reflects the People’s Bank of China’s (PBC) intention and efforts. Its duty is to ensure monetary stability. But it also has the responsibility to promote economic growth and stabilize employment. Sometimes these two aspects are consistent with each other, but at other times, contradictions could arise. The central bank is concerned about the sustainability of the economic momentum and has made RRR cuts to reduce cost for companies and to support them. At the same time, it needs to manage social expectations and control inflationary pressures. This means that in implementing policies, the economy determines the direction but the central bank would consider the extent. RRR cuts do not increase the base currency directly; rather, they affect the currency multiplier, thus affecting the overall supply of money. To avoid a fiscal deficit, the more banks cooperate, the more active the financial market would be, which would allow the central bank to control the pace and intensity of subsequent easing. And the opposite would be true as well.
A stance that is neither loose nor tight, but reasonable and moderate
First, from the perspective of cross-cycle and macro policy convergence for the next two years, considering the pandemic and external environment, the basic premise of liquidity in general is to maintain stability or even abundance. Second, how to ensure sufficiency and abundance at the same time? The central bank has stated that there be neither liquidity tension nor liquidity caused by excessive investment. We believe the 「neither loose nor tight」 stance has a bearing on two points: price and excess deposit reserve ratio. Observing the weighted price changes of capital interest rates, overall control deviation from the policy interest rate is neither high nor low, but there is an interval or lower limit. After stabilizing the preventive motivation of controlling financial institutions, the excess reserve ratio is maintained at a low level.
Looking ahead to 2H21, the market will focus on the supply of local debt and large-scale MLF maturities pressure. Above all, we expected the central bank will hedge liquidity in advance. Combined with the central bank’s repeated emphasis on price rather than quantity, and the current situation of interest rate stability, we expect that the capital interest rate still has a lower limit, which was flat in 2Q21.Therefore, market interest rate changes around policy interest rates should relate to the performance of the central bank, which also means that when market interest rates continue to deviate from policy interest rates for specific reasons, regression would be inevitable.
The policy benefit from cost reduction lies in the central bank’s RRR cuts and guidance on debt cost control through deposit interest rate pricing reforms. If the cost of banks’ liabilities could be reduced in that way, then the central bank would urge banks to transmit the policy benefit to the real economy, which could mean that the LPR would be reduced in the future, a reflection of compression. This means that RRR cuts are possible, but MLF interest rates might not change.
Under the policy guidance, banks are expected to increase credit investment in key areas, hedging the contraction of non-standard and net credit financing, with an eye on the impact of the policy implementation and its effect on credit in 2H21.
Summarizing China’s 2Q21 Monetary Policy Report, the central bank is maintaining the view from the Politburo meeting, emphasizing foresight, effectiveness and autonomy, and highlighting expected management. Considering the pandemic and external factors, it is clear that future monetary easing would be maintained under the cross-cycle, but based on the combination of subsequent macroeconomic and other macro policies, TFI believes that the future is likely to feature a volume and price equilibrium, with the central bank continuing to use pricing tools prudently.
Two points to follow up: policy implementation and employment
Since the pandemic, the central bank has repeatedly stressed that 「more attention will be paid to employment goals」. Key to this is a survey of unemployment rates in 31 big cities and towns. If the current pandemic situation increases employment pressure to exceed the level at the beginning of the year, and at the same time multiple policy effects are not reflected, we would expect a higher possibility of interest rate cuts. Risks include: marginal tightening of monetary policy; economic growth uncertainties; and overseas market risks.
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The consensus view is that the current monetary easing stance ought to continue. We believe the key point is: to what extent should easing be carried out? We consider what the market could expect.
How far should easing go?
China’s 2Q Monetary Policy Report reflects the People’s Bank of China’s (PBC) intention and efforts. Its duty is to ensure monetary stability. But it also has the responsibility to promote economic growth and stabilize employment. Sometimes these two aspects are consistent with each other, but at other times, contradictions could arise. The central bank is concerned about the sustainability of the economic momentum and has made RRR cuts to reduce cost for companies and to support them. At the same time, it needs to manage social expectations and control inflationary pressures. This means that in implementing policies, the economy determines the direction but the central bank would consider the extent. RRR cuts do not increase the base currency directly; rather, they affect the currency multiplier, thus affecting the overall supply of money. To avoid a fiscal deficit, the more banks cooperate, the more active the financial market would be, which would allow the central bank to control the pace and intensity of subsequent easing. And the opposite would be true as well.
A stance that is neither loose nor tight, but reasonable and moderate
First, from the perspective of cross-cycle and macro policy convergence for the next two years, considering the pandemic and external environment, the basic premise of liquidity in general is to maintain stability or even abundance. Second, how to ensure sufficiency and abundance at the same time? The central bank has stated that there be neither liquidity tension nor liquidity caused by excessive investment. We believe the 「neither loose nor tight」 stance has a bearing on two points: price and excess deposit reserve ratio. Observing the weighted price changes of capital interest rates, overall control deviation from the policy interest rate is neither high nor low, but there is an interval or lower limit. After stabilizing the preventive motivation of controlling financial institutions, the excess reserve ratio is maintained at a low level.
Looking ahead to 2H21, the market will focus on the supply of local debt and large-scale MLF maturities pressure. Above all, we expected the central bank will hedge liquidity in advance. Combined with the central bank’s repeated emphasis on price rather than quantity, and the current situation of interest rate stability, we expect that the capital interest rate still has a lower limit, which was flat in 2Q21.Therefore, market interest rate changes around policy interest rates should relate to the performance of the central bank, which also means that when market interest rates continue to deviate from policy interest rates for specific reasons, regression would be inevitable.
The policy benefit from cost reduction lies in the central bank’s RRR cuts and guidance on debt cost control through deposit interest rate pricing reforms. If the cost of banks’ liabilities could be reduced in that way, then the central bank would urge banks to transmit the policy benefit to the real economy, which could mean that the LPR would be reduced in the future, a reflection of compression. This means that RRR cuts are possible, but MLF interest rates might not change.
Under the policy guidance, banks are expected to increase credit investment in key areas, hedging the contraction of non-standard and net credit financing, with an eye on the impact of the policy implementation and its effect on credit in 2H21.
Summarizing China’s 2Q21 Monetary Policy Report, the central bank is maintaining the view from the Politburo meeting, emphasizing foresight, effectiveness and autonomy, and highlighting expected management. Considering the pandemic and external factors, it is clear that future monetary easing would be maintained under the cross-cycle, but based on the combination of subsequent macroeconomic and other macro policies, TFI believes that the future is likely to feature a volume and price equilibrium, with the central bank continuing to use pricing tools prudently.
Two points to follow up: policy implementation and employment
Since the pandemic, the central bank has repeatedly stressed that 「more attention will be paid to employment goals」. Key to this is a survey of unemployment rates in 31 big cities and towns. If the current pandemic situation increases employment pressure to exceed the level at the beginning of the year, and at the same time multiple policy effects are not reflected, we would expect a higher possibility of interest rate cuts. Risks include: marginal tightening of monetary policy; economic growth uncertainties; and overseas market risks.
免责声明(DISCLAIMER):
此文件仅发给指定收件人或机构。其内容可能包含某种享有法律特权或者需要保密的信息。对于任何未经本公司授权而对本文件所载内容进行使用、披露、分发、变更之行为及由此产生的后果，天风国际证券集团有限公司及其联属公司和附属公司（「天风集团」）概不承担任何责任。如您并非此文件的指定收件人或机构，请立即通知天风集团，并立即销毁此文件。谢谢合作。
This message is intended only for the individual or entity to which it is addressed. It may contain legally privileged and/or confidential information. TF International Securities Group Limited and its affiliates and subsidiaries (「TF Group」) does not accept liability for the unauthorized use, disclosure, distribution and/or alteration of any information it contains or the consequences thereof. If you are not an intended recipient, please inform TF Group and destroy this message immediately. Thank you.
