Minsheng Securities: The continuation of a major policy

Today's financial "prelude battle" set a good start for the pre-holiday policy expectations. The press conference held by the State Council Information Office in the morning, whether it's the timing of the meeting, the level of attendees, or the extent of the content exceeding expectations, all highlight a full sense of "sincerity":

Seizing the last time window of the third quarter, undoubtedly aims to gain time and stabilize the further improvement of the economy in the fourth quarter.

The heads of the three major financial departments gathered together, a level of gathering that may not have been seen since the ministerial press conference after the Two Sessions in March this year.

Directly addressing the market's most concerned issues such as capital markets, real estate, financial risks, etc., and issuing multiple incremental policies.

The market is "excited," with the Shanghai Stock Exchange rising by more than 2% at midday, and the exchange rate also breaking through 7.04. The "full of sincerity" financial policies undoubtedly help stabilize confidence. However, to truly implement measures to stabilize the economy in the fourth quarter, the policy level may need to strike while the iron is hot and introduce more policy combinations that can generate tangible work volume in the short term. Finance will undoubtedly be the most eye-catching in the next steps.

What may "impress" the market the most is the country's more supportive attitude towards the capital market. This time, the central bank has newly established two tools to support the stock market: the first is to establish convenience for securities, funds, and insurance companies to swap, with a scale of 500 billion yuan, which may be expanded in the future as needed; the second is to establish a special refinancing facility for stock repurchase and increase holdings, guiding banks to provide loans to listed companies and major shareholders to support stock repurchases and increased holdings.

From a specific operational perspective, although the central bank's balance sheet does not directly take on stock assets, stock assets have essentially become collateral for the central bank's liquidity injection and bank credit expansion, which is a significant first in the history of China's monetary policy and holds great significance for the stock market.

From overseas experience, the Primary Dealer Credit Facility (PDCF) of the Federal Reserve may be similar in mechanism, PDCF injected a large amount of funds into financial institutions during the 2008 financial crisis and early 2020, effectively alleviating liquidity risks at that time.

****The importance of reducing the burden on residents due to the weak investment momentum has been highlighted again. Considering that there is a significant gap between the interest rates of existing housing loans and new housing loans in cities such as Beijing, Shanghai, and Shenzhen, high interest payments by some residents may affect their consumption capacity. Lowering the interest rates of existing housing loans to the level of new loans is expected to further boost consumption.

Of course, we must not put too much pressure on banks. According to the policies announced by the central bank, our calculations show that a 50bp reduction in existing home loan rates and a simultaneous 20bp reduction in 1-year and 5-year LPR will respectively affect the bank's interest margin by 6bp and 12bp; and if the deposit rate is reduced by 20bp in the near term, it will boost the bank's interest margin by about 14bp, partially offsetting the pressure from interest rate cuts.

Strengthening the fence of financial risks is essential to better serve the real economy with finance. The press conference also announced plans to increase core Tier 1 capital for six large commercial banks, easing the trend of narrowing interest margins and slowing profit growth from a more fundamental level, which is beneficial for stabilizing these major players supporting the real economy.

Based on historical experience, RRR cuts are often the "vanguard" of a package of policies: after the central bank cut the RRR at the end of November 2022, the "14th Five-Year Plan" for expanding domestic demand was implemented in December, and in early January 2023, the central bank established a mechanism for adjusting mortgage rates; after the RRR cut in September 2023, in October, the Central Huijin announced an increase in ETF holdings, and the Standing Committee of the National People's Congress approved the issuance of trillions of national bonds; after the RRR cut at the end of January 2024, the real estate financing coordination mechanism accelerated its implementation, followed by a 25bp reduction in the 5-year LPR by the central bank in February to stabilize the real estate market. With today's announcement of an RRR cut, the implementation of interest rate cuts and adjustments to existing home loan rates are pending, and more follow-up policies to stabilize the economy may already be "on the way".

Will fiscal policy take over the "baton" from monetary policy? Considering that new special bonds have just entered the fast issuance channel and there is still capacity for the issuance of ultra-long-term special national bonds, it will take some time for funds to be allocated to projects. Therefore, the current focus of fiscal policy is more on how to make good use of existing policies. In addition, we believe that the trend of fiscal policy shifting from "stabilizing investment" to "promoting consumption" is also emerging, including the use of ultra-long-term special national bonds for "two new" areas as strong evidence. Of course, monetary policy has shown a loose trend, and after fiscal policies are well utilized and exhausted, fiscal easing may also be on the way.

Article Author: Tao Chuan S0600520050002, Shao Xiang S0600120120023, Wu Bin, Li Xiaoyu, Article Source: Chuan Yue Global Macro, Original Title: "The Unfinished Story of Major Policies (People's Livelihood Macro Tao Chuan Team)"