2022年1月29日

Equality Lian: How to Understand “Pushing Real Lending Interest Rate to Lower Further”

Zhongxin Jingwei Client (March 12) Title: “Lian Equality: How to Understand” Promoting the Further Reduction of Real Loan Interest Rate”

Author Lian Ping (Chief Economist and President of the Institute) Liu Tao (Deputy President of the Institute)

This year, according to the March 5 government work report, we will “optimize regulation of deposit interest rates, push for further reductions in real lending rates, and continue to guide the financial system to yield profits to the real economy”. At the current sensitive moment when all parties in the market have serious differences on when the monetary policy will change and whether liquidity will become tighter, the explicit inclusion of “to further reduce the real lending interest rate” in the government work report has aroused wide concern in the market, but also generated different interpretations.

We believe that in order to accurately understand the concept of “promoting further reduction of real loan interest rate”, we need to comprehensively analyze the overall environment of monetary policy, the pricing mechanism of loan interest rate and the cost of bank debt side, so as to further enhance the understanding of the return of monetary policy to neutral and the policy of “not making a sharp turn”.

From the perspective of China’s practice, the tightening of monetary policy can be manifested as the introduction of regulation measures such as the increase of the deposit reserve ratio and the increase of the benchmark deposit and lending rates. Raising the reserve requirement ratio will tighten banks’ loanable funds, constraining banks’ ability to expand credit, especially for small and medium-sized banks. Small and medium-sized banks are just an important new force serving local private enterprises, small and micro enterprises. If the credit scale of these banks shrinks, the actual loan interest rate of relevant enterprises will not be reduced, but will rise. From the realistic financial conditions, now is not a favorable time to raise the deposit reserve ratio. The reason is that in recent years, with the increasingly diversified investment channels of Chinese residents’ wealth, a large number of funds continue to flow into the capital market or other financial assets, which is the so-called “resident deposit moving” phenomenon, and thus the capital scale stock in the banking system has undergone a relatively obvious change. For example, all measures of deposit balance growth in financial institutions have fallen from 13.4 per cent in July 2015 to 8.1 per cent in February 2020. During the period of the epidemic in 2020, due to the restraining of household consumption and enterprise production activities, the growth rate of deposits picked up passively to a certain extent, with a peak of 10.7% in November 2020 and a drop to 10.4% in January 2021. With the epidemic under effective control and household consumption and production returning to normal, the downward trend of deposit growth is likely to continue for a long time in the future. In this environment, tightening monetary policy requires serious consideration.

At the financial market level, the tightening of monetary policy is manifested by tight market liquidity, such as the rapid rise of money market interest rates represented by DR007. In the era of “double track interest rate system”, the money market and the credit market “operate independently”, and changes in the interest rate and liquidity of the money market can hardly affect the interest rate and fund supply of the credit market. However, with the accelerated reform of interest rate liberalization in recent years and the efforts of the monetary authorities to clear the transmission mechanism of monetary policy, the liquidity strain in the money market, if it lasts for a long time, will also affect the loan interest rate and credit supply scale of banks to a certain extent.

Tightening monetary policy is not in the same direction as the current economic situation. The PMI data for February released by the National Bureau of Statistics (NBS) shows that the manufacturing PMI has fallen for three consecutive months. In particular, the PMI of medium and small enterprises are both below the demarcation line between expansion and contraction, with 49.6% and 48.3% respectively, indicating that their operating conditions are still difficult. The non-manufacturing PMI index, which measures activity in the services and construction sectors, also fell for three months in a row, suggesting that the recovery in those sectors remains fragile. In addition to the official PMI, the Caixin PMI also broadly converged in recent March. When the real economy has not fully recovered and still needs the sustained support of reasonable and abundant credit, the time to tighten monetary policy is not yet ripe.

Both the official and Caixin PMIs have fallen for three consecutive months

Source: National Bureau of Statistics

In August 2019, the People’s Bank of China (PBOC) launched a reform to improve the lending market quoted interest rate (LPR) formation mechanism. Commercial banks began to adjust the way of loan pricing, which was officially decoupled from the benchmark loan interest rate that had been in place for many years. Instead, they decided the loan interest rate by adding or substituting points on the basis of LPR, thus breaking the implicit lower limit of loan interest rate.

From August 2019 to April 2020, as LPR continues to decline, the overall interest rate of bank loans will also gradually decline, and the financing cost burden of enterprises will be significantly improved. To strip out the impact of special policies during the outbreak, it is worth comparing the situation before the outbreak. From January to July 2019, the weighted average interest rate of new enterprise loans fluctuated around 5.30%, while in December 2019, the weighted average interest rate of new enterprise loans was 5.12%, which was 0.2 percentage points lower than before the LPR reform, and the decline was significantly more than the LPR decline.

Monthly change of LPR over 1 year and 5 years

Data source: Wind

Downturn of LPR helps to drive down the bank lending rate, but it does not mean that the decline of the bank’s actual lending rate must be based on the behavior under LPR. Since May 2020, the LPR has remained unchanged for 10 consecutive months, i.e., the LPR for the one-year period is 3.85% and the LPR for the five-year period and beyond is 4.65%. In spite of this, the actual bank lending rate still shows a certain downward trend. In terms of the composition of general loans in December 2020, the loans with interest rates higher than LPR(plus point) accounted for 66.04%, the loans with interest rates equal to LPR accounted for 7.02%, and the loans with interest rates lower than LPR(minus point) accounted for 26.93%. From the perspective of monthly changes, since May 2020, not only the proportion of loan interest rate reduction points has fluctuated and increased, but the proportion of each interval of loan interest rate plus points has also been decreasing month by month.

Therefore, it cannot be inferred that the next stage of LPR is bound to fall by “pushing the real lending rate down further”. But the LPR is less likely to rise this year, as that would undoubtedly send a policy signal in the opposite direction, putting pressure on lending rates overall to move higher, pushing real lending rates away from the target of “further reduction”. In the next phase, LPR is likely to remain at the current level, barring a turnaround in the macroeconomic environment in the second half of the year.

From a near-term market perspective, there are at least three explanations for “pushing real lending rates lower”. First, the decline in lending rates is a structural decline, mainly small and micro business lending rates fell, and structural monetary policy tools such as relending support for inclusive finance will help the interest rate down. The other is that nominal interest rates remain unchanged, but inflation rises, leading to lower real lending rates. Third, after the order of deposit competition is further standardized, the debt cost of commercial banks is likely to decline, thus creating space for the decline of loan interest rates on the asset side of banks.

The first explanation, which limits the fall in lending rates to small and micro businesses, seems too narrow. Accelerate the pratt &whitney financial development, reduce the small micro enterprise financing cost is in recent years, the government and regulatory continue to push a priority, but are not under the background of comprehensive recovery in demand at home and abroad, other entity enterprises, including medium size, and even some of the larger private manufacturing enterprises and service enterprises, also need to Banks and other financial institutions in the financing “lend a hand”, in order to recover, increase your energy.

The second explanation attributes much of the fall in real lending rates to rising inflation. That is, assuming nominal lending rates do not change and inflation goes up, real lending rates are likely to go down. Our previous forecast shows that both CPI and PPI are likely to rebound in the first and second quarters of this year, and the year-on-year growth rate in the third and fourth quarters will be stable or somewhat adjusted. Among them, CPI rebound is relatively moderate, is expected to remain at a low level of 1.0-1.5% for the whole year. PPI in crude oil, metals and other commodities driven by the relatively strong trend. The problem, however, is that a passive decline in real lending rates is clearly not consistent with the positive and proactive connotations of the word “push”.

A third explanation might be closer to the actual intent of the policy. From the perspective of context, the first sentence of “promote further reduction of real loan interest rates” is “optimize deposit interest rate regulation”, and there is a certain logical correlation between the two. In the fourth quarter of 2020 the central bank monetary policy implementation report, “deposit market competition order, be helpful for maintaining a deposit market competition order, and is beneficial to stabilizing the financial institution debt costs reasonable, promote reduce social cost of funding”, clearly expounds the deposit interest rate management, stable bank debt cost, reduce the transmission mechanism between and among social financing costs. Since 2019, the People’s Bank of China (PBOC) has systematically corrected innovative deposit products that banks do not regulate, such as current deposits bearing interest based on current deposits and time deposits bearing interest based on current deposits. It has brought the minimum guaranteed rate of return on structured deposits into self-disciplined management, and strengthened the management of deposits in different places, thus maintaining orderly competition in the deposit market. In other words, it is stable deposit interest rate. At the end of 2020, the minimum yield of structured deposit guarantee was 1.25%, down 1.18 percentage points compared with the end of 2019, while the deposit products with annual yield over 4% in the market were almost extinct before that. The monetary policy implementation report of the People’s Bank of China in the fourth quarter of 2020 stressed that in 2021, the central bank will continue to play the role of interest rate self-discipline mechanism, maintain orderly competition in the deposit market, keep the cost of banks’ liabilities stable, and “create a good environment for promoting the market-oriented reform of interest rate and promoting stable and stable comprehensive financing cost of enterprises”. Therefore, under the background of monetary policy returning to normal and moderately tight, LPR is expected to remain stable, and regulation will further reduce the actual lending interest rate by optimizing deposit management and reducing the cost of banks’ debt side.

In conclusion, we believe that it is feasible to “push for further reductions in real lending rates”. First, the policy clearly put forward the requirement of reducing the real loan interest rate; Secondly, the mechanism of LPR plus or minus points ensures that the loan interest rate has a certain space to move down; Thirdly, the orderly regulation of deposit interest rate will indeed promote the stability of the actual lending interest rate. Finally, the periodic upward price objectively contributes to the downward real interest rate. In addition, measures to strengthen financial infrastructure, such as “accelerating the pace of credit information sharing” and “improving the loan risk sharing and compensation mechanism” proposed in the government work report, are also conducive to reducing the information asymmetry between banks and enterprises, thus indirectly reducing the financing cost of enterprises. But on the other hand, it should be noted that the current domestic and international economy has entered the recovery track under the circumstances, the real lending rate reduction space is limited. In particular, if the subsequent monetary policy of the Federal Reserve changes course, even domestic liquidity tightening and interest rate rise can not be ruled out. Therefore, for a period of time to come, monetary policy will most likely remain neutral, “stable”, not abrupt changes, flexible, accurate, reasonable and appropriate, to ensure that liquidity does not lack or overflow. (Xin Xin Jingwei APP)

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