Core Viewpoints

Events:

On September 24, 2024 (Tuesday) at 9:00 AM, the State Council Information Office held a press conference, inviting the Governor of the People's Bank of China, Pan Gongsheng, the Director of the State Administration of Financial Regulation, Li Yunze, and the Chairman of the China Securities Regulatory Commission, Wu Qing, to introduce the situation of financial support for high-quality economic development and answer questions from journalists.

Core Viewpoints:

Since August, the market's anticipation for the introduction of more proactive macro policies has been continuously heating up, and this policy has been implemented in the form of a "combination punch," showing full sincerity. We believe that the stock market will benefit from the "double whammy" effect of low odds and a rebound in risk appetite, with a high degree of certainty for an upward trend. The bond market is short-term bearish and long-term bullish, with "short-term bearish" due to the previous interest rate cut benefits being fully priced in, and institutions taking profits as the fourth quarter approaches; "long-term bullish" is because the overall rate pricing center has shifted downward, and it is expected that the bond price correction will be limited. The recent appreciation of the renminbi has already reflected economic expectations, but it has also been promoted by the force of settlement, whether the US dollar to renminbi exchange rate will break 7 depends on whether the US dollar index will fall below 100 or whether A-shares will continue to be strong and bring in incremental funds.

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Risk Warning: Policy implementation is not as expected.

1. The policy is full of sincerity, and we can be more optimistic

Since August, the market's anticipation for the introduction of more proactive macro policies has been continuously heating up for three main reasons: First, after the actual GDP growth rate fell to 4.7% in the second quarter, the main economic data disclosed since the third quarter has been weak. Second, the Federal Reserve has started an interest rate cut cycle, and the initial interest rate cut is 50bp, which is quite strong, giving domestic policy space for proactive monetary policy. Third, the former People's Bank of China Governor Yi Gang publicly discussed the risk of "deflation," which may mean that the demand for policy adjustment is increasing.

This policy has been implemented in the form of a "combination punch," showing full sincerity. Looking back at the three adjustments of total quantity policies this year: the first time, in January-February, the reserve requirement ratio was reduced and the LPR was reduced asymmetrically; the second time, in July, the main interest rate tool centered on OMO interest rates was reduced; the third time, in late September (this time), a combination of total tools and structural tools. From the tone, it has gone from loose to more loose, and the policy strength has been continuously increasing.

From the specific connotation, this round of policy "combination punch" can be understood at four levels:The first level involves a dual relaxation of quantitative and price-based aggregate tools. Quantitative tools include a 50bp reduction in the reserve requirement ratio, providing long-term liquidity of 1 trillion yuan; price-based tools involve a 20bp reduction in the policy "anchor" 7-day reverse repo rate to 1.5%.

Thanks to the narrow liquidity easing, bond prices have been continuously setting new highs recently, and the main reason for the loose funding situation is the disintermediation of deposits. Therefore, the interbank certificate of deposit rate, which represents the marginal liability cost of banks, remains high, increasing the spread with the yield on the asset side. Considering that commercial banks bear more tasks of supporting fiscal easing in the primary market, the reserve requirement ratio cut is conducive to alleviating the consumption of bank excess reserves by government bond issuance and also helps to hedge the pressure of a large amount of MLF maturing in the fourth quarter across quarters.

Furthermore, in the new monetary policy control framework, the 7-day reverse repo rate is the core of the policy "anchor". The 20bp reduction in the 7-day reverse repo rate this time sends a more positive signal, which is conducive to the transmission from the policy rate to the market rate, and systematically lowers the pricing center of the interest rate market.

The second level is the acceleration of credit expansion through structural tools. The main policies include increasing the support of central bank funds for the real estate sector, making good use of the 300 billion yuan mortgage reloan that has been approved, and increasing the proportion of central bank fund support to 100% to enhance the willingness of local purchases. In addition, the "Financial 16 Articles" and the operational property loan policies have been extended to the end of 2026, supporting the credit expansion of the real estate industry.

More importantly, the market's strong expectations for the reduction of existing mortgage interest rates have been realized, with an expected reduction of about 50bp. Previously, with the reduction of the LPR rate, the weighted average interest rate of new personal housing loans has quickly declined, deeply inverting with the interest rate of existing mortgage loans, leading to continuous mortgage prepayments, that is, the household sector is shrinking its balance sheet.

Regarding the conflict between the reduction of mortgage interest rates and the narrowing of bank net interest margins, this round of policy provides directional guidance: on the one hand, balancing the order of priorities in the multi-goal decision-making system, promoting credit expansion is the current focus; on the other hand, it has created space for commercial banks to protect net interest margins, also reflecting the financial concession to the real economy.

The third level is the innovation of structural tools to support the capital market. This includes the creation of swap convenience tools for securities, funds, and insurance companies, providing liquidity support to qualified financial institutions; the creation of stock repurchase and increase special reloans, providing liquidity support to listed companies and major shareholders. The focus of the swap convenience is on the scope of application, which is mainly targeted at securities, funds, and insurance companies, making up for the current shortage of primary dealers dominated by banks. The focus of the stock repurchase and increase reloan is on the loan interest rate of 2.25%, which is lower than the dividend rate of many listed companies at present.

Observing the structural tool box of the People's Bank of China, as of the end of June 2024, there are 3 long-term tools + 15 phased tools, with a total balance of 7.03 trillion yuan, and the main investment direction is relatively clear, mainly involving agriculture, small and micro enterprises, private enterprises, green, and manufacturing. The creation of these two new tools is the first time the People's Bank of China has created structural monetary tools to support the capital market, and the specific implementation conditions and details are pending announcement. In addition, from the Q&A, Governor Pan Gongsheng clearly stated that in addition to the initial 500 billion yuan (swap convenience) + 300 billion yuan (stock repurchase, increase reloan), there is still room for incremental growth.

The fourth level is to open up the imagination space for subsequent policies. The first演绎 path is that after the benchmark interest rate is reduced, the interest rate system will be adjusted accordingly, including the MLF interest rate, the 1-year and above 5-year LPR interest rate, bank deposit interest rates, and the pricing center of market interest rates, all of which will be reduced by about 20-30bp.

The second path is that it is possible to reduce the reserve requirement ratio by 25-50bp again within the year, and it is expected to be an asymmetric reduction, as large financial institutions have more room for reduction.The third path is policy coordination, and the space for fiscal policy to take effect is worth looking forward to. If there is any room for improvement in this round of policy adjustments, it is that the fiscal expansion anticipated by the market has been long overdue. We believe that in terms of the space for fiscal policy to take effect, it is quite clear that due to the potential existence of fiscal revenue and expenditure gaps within the year, it is necessary to increase the handover of profits from state-owned capital operations or issue additional government bonds in forms such as filling.

Improving the efficiency of converting fiscal funds into physical work volume depends on the adjustment of two mechanisms: First, weakening the certification of investment management upgrades, that is, conditionally relaxing the control over local government investment and financing; Second, directing special government bonds towards consumption, social security, elderly care, and promoting fertility fields. We believe that the adjustment of the first mechanism needs to wait until the resolution of implicit debt is temporarily concluded, and the adjustment of the second mechanism is already brewing and is worth looking forward to.

After the policy announcement, the macro mainline behind the capital market switched to economic recovery. As of the close on September 24, 2024, the Shanghai Composite Index rose by 4.15%, the 30-year government bond futures main contract fell by 0.99%, the US dollar against the renminbi spot exchange rate appreciated by 0.31% (as of 16:00), and the rebar index rose by 4.12%. It can be seen that the macro mainline behind the trading of major asset categories is that under the strong policy stimulus, the macro economy is expected to stabilize and recover.

Macro asset trend judgment: We believe that the stock market will benefit from the "double hit" effect of low odds and the rise in risk preference, and the certainty of the rise is relatively high. The bond market is short-term bearish and long-term bullish, with "short-term bearish" due to the previous interest rate cuts being fully priced, and institutions taking profits approaching the fourth quarter; "long-term bullish" is because the overall interest rate pricing center has moved down, and it is expected that the bond price correction range will be limited. Recently, the appreciation of the renminbi has priced the economic expectations, but it has also been promoted by the force of settlement, whether the US dollar against the renminbi exchange rate will break 7, it depends on whether the US dollar index will break below 100 or whether A shares will continue to be strong and bring incremental funds.

II. Risk Warning

Policy implementation is not as expected.