The Zhitong Finance App learned that Open Source Securities released a research report saying that starting February 5, the deposit reserve ratio of financial institutions will be lowered by 0.5 percentage points (excluding financial institutions that have implemented a 5% deposit reserve ratio); in addition, starting January 25, the interest rates for agricultural reloans, small reloans, and rediscount interest rates will each be lowered by 0.25 percentage points. The bank believes that the main reasons for the downgrade are: 1) filling the liquidity gap before the Spring Festival; 2) stabilizing macroeconomic expectations and steady growth; 3) providing a favorable policy environment for the capital market; 4) easing pressure on bank interest spreads, stabilizing banks' debt-side costs, and further opening up room for interest rate cuts. Looking ahead, the bank believes that the policy tone of steady growth and steady expectations has been confirmed. The first quarter may be the policy window period, and it is concerned about the possibility of interest rate cuts in February-March.
Incident: Starting from February 5, 2024, the deposit reserve ratio of financial institutions was lowered by 0.5 percentage points (excluding financial institutions that have implemented a 5% deposit reserve ratio); starting January 25, 2024, the agricultural support reloan, and rediscount interest rates were each reduced by 0.25 percentage points.
Open source securities views are as follows:
Reasons for the downgrade: hedging the Spring Festival liquidity gap, stabilizing macroeconomic expectations, boosting capital market confidence
First, make up for the liquidity gap before the Spring Festival. Factors such as tax payments, payments, and withdrawals before the Spring Festival usually lead to an increase in the liquidity gap. We estimate the liquidity gap for January 2024 to be about 2.4 trillion yuan. According to the average of M0 month-on-month value added in January 2019 to 2023, it is estimated that cash demand for January 2024 may result in a gap of 1.2 trillion yuan; assuming that the January payment scale is slightly higher than January 2023, the estimated payment reserve is about 430 billion yuan; net financing volume of government bonds declined sequentially in January, and fiscal deposits may be mainly contributed by fiscal balance differences. January is a major seasonal tax month. We expect fiscal deposits for January 2024 to be slightly higher than the average for January 2019 to 2023, about 700 billion dollars; assuming a net return of 100 billion dollars in open market currencies, slightly less than January 2023. Since 2012, there have been four pre-Spring Festival downgrades (2015, 2018, 2019, and 2020), supplementing long-term capital of 300-1500 billion yuan. This downgrade is before the Spring Festival, and the liquidity gap is not low compared to previous years, or there are considerations to hedge against the liquidity gap before the Spring Festival.
Second, stabilize macroeconomic expectations and steady growth. Economic data improved marginally in December, but real estate investment, sales, and financing were under pressure, and consumer spending tendencies did not continue the 2023Q3 recovery trend. Currently, steady growth still requires a relatively generous liquidity environment. The current downgrade will release about 1 trillion dollars in long-term capital, which will provide strong support for bank credit investment. Furthermore, the central bank lowered the interest rate for supporting small farmers by 25 bps, reflecting the “precise and effective” characteristics of monetary policy, targeted reduction in financing costs for small, micro and “three rural” enterprises, and relieving pressure on business operations. Previously, the central bank lowered reloan and rediscount interest rates for small-scale farmers in February, July, and December 2021, respectively. The first and third of these, the central bank lowered policy interest rates one month after lowering interest rates. Therefore, after targeted interest rate cuts at this time, the central bank is still likely to further reduce policy interest rates across the board.
Third, provide a favorable policy environment for the capital market. Central Bank Governor Pan Gongsheng said at the press conference of the State Information Office that “the People's Bank of China will strengthen countercyclical and cross-cycle 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.” This shows that current monetary policy adjustments not only support entities, but also send positive signals to the capital market and boost market confidence.
Finally, ease the pressure on bank interest spreads, stabilize banks' debt-side costs, and further open up room for interest rate cuts.
Downgrade impact: credit broadening or anchoring to weaker and more important areas
First, the downgrade will help ease credit in the real economy. Capital flows to the real economy through the banking system, and the upward trend in the economy is expected to be further consolidated. Governor Pan emphasized that to do a good job in the “five major articles” of technology finance, green finance, inclusive finance, pension finance, and digital finance, the People's Bank of China will also establish a credit market department. We believe that credit investment may be more accurate, focusing on structural adjustments, credit leniency, or anchoring to weaker and more important areas.
Second, in terms of liquidity, the central bank has recently maintained a tight balance of capital, and the interest rate spread between R and DR has widened. It is expected that there is limited room for the downgrade to drive capital interest rates downward. We have pointed out in “New Characteristics and Changes in 2024 - Rethinking China's Monetary Policy Goals” that interest rate cuts are a signal of the central bank's monetary easing and credit easing; however, market interest rates are the result of the central bank's comprehensive short-term liquidity and anti-capital idling adjustments.
Finally, in terms of asset prices, the probability that the stock market will rise in the short term after the downgrade is relatively high, but the medium- to long-term changes in the bond market and equity are not obvious. We believe that the magnitude of this downgrade has slightly exceeded expectations, and that it is a positive policy signal or that it will have a positive impact in the short term.
Follow-up outlook: room for interest rate cuts opens up, monetary policy may strengthen macroeconomic coordination
On the one hand, the policy tone of steady growth and steady expectations has been confirmed. The first quarter or the policy window period is concerned about the possibility of interest rate cuts in February-March. With the economy getting off to a good start in the first quarter, it is expected that infrastructure funding will be gradually implemented. If finance is more active and liquidity needs to be maintained, policy interest rates are expected to drive real interest rates downward, and room for interest rate cuts may open up further. We estimate that the reduction in deposit interest rates in December 2023 and the current downgrade will increase commercial banks' net interest spreads by 3-4 bps and 1.1 bps respectively. It is expected to increase the room for commercial bank loan interest rate cuts by 6-7 bp. The debt-side cost pressure on commercial banks has eased somewhat.
On the other hand, monetary policy is expected to enhance macroeconomic coordination. The press conference of the State Information Office proposed that the central bank will create a favorable monetary policy environment for the operation of financial markets, including the capital market, support high-quality housing enterprises to improve liquidity conditions, and cooperate with local governments in risk mitigation, etc., reflecting that subsequent monetary policies will play a coordinating role and provide a good liquidity environment for finance, real estate, and finance.
Risk warning: The economy declined beyond expectations; policy strength fell short of expectations.