"Rate cut"! China's 1-year and 5-year LPR reduced by 10 basis points on July 1

In July, the LPR rates for 1-year and 5-year terms both decreased by 10 basis points.

On Monday, July 22nd, the People's Bank of China authorized the National Interbank Funding Center to announce that the Loan Prime Rate (LPR) for July 22, 2024, is as follows: the 1-year LPR is 3.35%, and the 5-year LPR is 3.85%, both down by 10 basis points from the previous values, which had remained unchanged for four consecutive months.

The central bank stated that in order to strengthen expectation management and better align the LPR release time with the operation time of the financial market, starting from July 22, 2024, the LPR release time will be adjusted from the 20th of each month (postponed in case of holidays) at 9:15 am to 9:00 am.

On the same day, the central bank announced that the open market 7-day reverse repurchase operations will be adjusted to fixed-rate, quantity-based bidding, with the operation rate reduced from 1.80% to 1.70%. On Monday, a 7-day reverse repurchase operation of 58.2 billion yuan was conducted using fixed-rate, quantity-based bidding, as opposed to the previous rate-based bidding.

To increase the tradable bond scale and alleviate the supply and demand pressure in the bond market, institutions participating in the Medium-term Lending Facility (MLF) with demand to sell medium and long-term bonds can apply for phased exemptions of MLF collateral starting this month.

Following the announcement, the offshore renminbi against the US dollar briefly declined, breaking below 7.2900. The yields of China's 10-year government bonds, policy bank bonds, and ultra-long-term government bonds all decreased.

Previously, a report from Shenwan Hongyuan pointed out that there is a strong expectation for LPR mechanism reform and rate cuts. On one hand, the focus is on whether LPR will decouple from MLF and complete the policy rate reform, with a greater focus on short-term policy rates. On the other hand, considering the apparent weakness in credit demand and the mid-year stable growth window in July-August, despite the central bank's continued attention to long-term bond risks, the necessity of lowering LPR remains strong.

The institution predicts that if this LPR rate cut occurs, it will drive a rapid downward movement in bond yields, and given the central bank's low tolerance for rapid declines in long-term bond yields, it is not ruled out that the central bank will adjust long-term bond yields by buying and selling government bonds, significantly amplifying fluctuations in long-term bond yields.

A research report from CITIC Securities indicated that based on overseas experience and recent policy statements, the LPR pricing mechanism may be improved to enhance policy efficiency and marketization. In the short term, there is a possibility of LPR rate cuts to create more favorable policy conditions for credit recovery.

Huachuang Securities stated that there is a relatively high spread between LPR and MLF rates, with some room for compression. Currently, the spread between LPR and the 1-year MLF rate is at 95 basis points, at a historically high level. With the fading influence of the central rate of the MLF mid-term policy rate, it is not ruled out that the policy rate will be maintained, and there is a possibility of LPR rate cuts to compress the spread with MLF. As the recent monetary policy framework reform accelerates, the main focus is on the possibility of a reduction in the 1-year LPR and the gradual "decoupling" from MLF For the bond market, if adjusted, it is expected that the disturbance of "loose credit" may be relatively limited. Currently, both residents and corporate sectors have weak expectations. If the LPR is adjusted downward alone, the boost to the expectation of "loose credit" may also be limited; furthermore, from a comparative perspective, it may also form a certain positive impact on the bond market