Many new proposals - 6 key signals from the People's Bank of China's second quarter monetary policy report

Event:

On August 9th, the People's Bank of China released the "China Monetary Policy Implementation Report for the Second Quarter of 2024" (referred to as the "Report" hereinafter), which includes 5 columns: "Establishing a sound deposit and loan interest rate formation mechanism determined by market supply and demand", "Further improving the market-oriented interest rate control mechanism", "Supporting the sustainable development of the housing rental industry", "The impact of the net asset value mechanism of wealth management products on the public investors", "Closely monitoring the monetary policy trends of major central banks overseas".

Key Points:

The main tone of this report basically continues the statements of the July 30th Political Bureau meeting and the August 2nd People's Bank of China work meeting, including concerns about the economy, strengthening countercyclical adjustments, etc. However, there are also many new wordings and requirements, especially regarding the current focus and transformation of monetary policy, preventing interest rate risks, stabilizing the real estate market, the Fed's interest rate cuts, etc. Looking ahead, it continues to emphasize: the current economic downward pressure is not small, insufficient demand remains the core contradiction, and achieving the annual target requires policies to "continue to exert force and be more forceful". Specifically on the monetary side, easing is still the general direction, and there is a high probability of reserve requirement ratio cuts and interest rate cuts within the year.

1. In comparison, this time the overall tone of the monetary policy basically continues the statements of the previous July 30th Central Political Bureau meeting, August 2nd People's Bank of China work meeting, etc., including "A prudent monetary policy should be flexible and moderate, precise and effective; enhance the consistency of macroeconomic policy orientation, strengthen countercyclical adjustments; resolutely prevent exchange rate overshooting risks", etc.

2. There are also many new wordings and requirements, emphasizing again that "a prudent monetary policy should pay attention to balancing the relationship between short-term and long-term, stable growth and risk prevention, internal balance and external balance", adding "deeply explore effective credit demand, accelerate the transformation of reserved projects", indicating that stabilizing growth should be the focus of monetary policy in the second half of the year; emphasizing "advancing the transformation of the monetary policy framework", adding "emphasizing the improvement of the quality of LPR quotations, rationalizing the relationship between loan interest rates and bond yields and other market rates; gradually increasing the trading of government bonds in open market operations", indicating that the reform of the central bank's monetary policy framework will accelerate (in three directions), and the central bank's operational thinking will also change; adding "preventing interest rate risks", pointing out that in response to the rapid decline in interest rates, the central bank has shifted from "guiding expectations" to "on-site operations", and short-term interest rate fluctuations may increase; analyzing the trends of overseas central bank monetary policies in the columns, believing that "the specific timing of the Fed's interest rate cut will still depend on future data changes".

3. Specifically, there are 6 major signals:

Signal 1: The People's Bank of China has become more concerned about the global economy, believing that "the momentum of global economic growth is weak, and growth in different regions continues to show differentiation"; more concerned about the domestic economy, continuing the statements of the July 30th Political Bureau meeting such as "the increasing adverse impact of the external environment, insufficient effective domestic demand, and pains in the transformation of old and new driving forces".

Signal 2: Regarding global inflation, the People's Bank of China believes that "inflation pressures in developed economies have eased somewhat", but also points out that inflation "is slowing down, and the risk of repeated fluctuations still exists", mainly due to "geopolitical conflicts leading to continued upward pressure on commodity prices" and "rapid wage growth in the US and Europe, with service inflation still sticky"; Regarding domestic inflation, the central bank stated that with the improvement of consumer demand and the further balance of domestic supply and demand, domestic prices in the second half of the year are "expected to moderately rise". The central bank also continues to emphasize "maintaining price stability and promoting moderate price increases as important considerations for grasping monetary policy".

Signal 3: The basic tone of monetary policy continues from the July 30th Politburo meeting, the August 2nd central bank work conference, etc., including statements such as "a prudent monetary policy should be flexible and moderate, precise and effective; enhance the consistency of macro policy orientation, strengthen countercyclical adjustments", etc. However, there are also many new changes, including reiterating the need to "balance short-term and long-term, stable growth and risk prevention, internal balance and external balance in a prudent monetary policy", adding "deeply explore effective credit demand, accelerate the transformation of reserve projects", emphasizing "accelerating the improvement of the central bank system, promoting the transformation of the monetary policy framework", adding "preventing interest rate risks", and significantly enhancing the focus on technology in structural policy tools.

Signal 4: The weighted average interest rate for loans in the second quarter significantly fell, with both residential mortgage rates and corporate loan rates hitting historic lows again.

Signal 5: In the real estate sector, the emphasis continues on "promoting stable and healthy development of the real estate market" and "making efforts to ensure the effectiveness of financial policy measures already introduced".

Signal 6: Column 5 "Closely Monitoring the Monetary Policy Trends of Major Overseas Central Banks" points out that "marginal changes in price and employment data create conditions for the Fed to cut interest rates", but the "specific timing of the rate cut will still depend on future data changes", and the spillover effects of the rate cut are worth paying attention to.

The main text is as follows:

Signal 1: The central bank's concerns about the global economy have increased, believing that "global economic growth momentum is weak, and growth in different regions continues to show differentiation"; more concerns about the domestic economy, continuing the statements from the July 30th Politburo meeting such as "increasing adverse impacts from the external environment, insufficient effective domestic demand, and pains in the transformation of old and new growth drivers".

Regarding the global economy, the central bank's attitude is more pessimistic than in the first quarter, believing that "global economic growth momentum is weak" and citing forecast data from international organizations such as the International Monetary Fund (IMF) as evidence (forecasted global economic growth rates for 2024 are 3.2%, 2.6%, 3.1%, still far below the historical average of 3.8% from 2000 to 2019). At the same time, the central bank continues to emphasize that "growth in different regions continues to show differentiation".

Regarding the domestic economy, the central bank remains optimistic in the medium to long term, believing that "China's economic development has strong resilience, huge potential, and strong support". However, the central bank still emphasizes that in the short term, "the stable operation of the economy still faces some challenges", including "the complexity, severity, and uncertainty of the external environment remain significant, leading to increased adverse impacts", "global economic growth momentum is weak, with frequent local conflicts and turmoil, exacerbating global issues", "insufficient effective domestic demand, economic operations showing differentiation, significant risks still exist in key areas, and pains in the transformation of old and new growth drivers" Signal 2: Regarding global inflation, the central bank believes that "inflationary pressures in developed economies have eased somewhat," but also points out that inflation "is slowing down, with the risk of fluctuations still existing," mainly due to "geopolitical conflicts leading to continued upward pressure on commodity prices" and "rapid wage growth in the US and Europe, with service inflation remaining sticky." With regards to domestic inflation, the central bank states that along with the improvement in consumer demand, "the domestic supply and demand are further tending towards balance," and in the second half of the year, domestic prices "are expected to moderately rise." The central bank also continues to emphasize "maintaining price stability and promoting moderate price increases as important considerations in guiding monetary policy."

For global inflation: The central bank believes that "inflationary pressures in developed economies have eased somewhat," but "the speed of inflation decline is slower than expected." Looking ahead, due to "geopolitical conflicts leading to continued upward pressure on commodity prices" and "rapid wage growth in the US and Europe, with service inflation remaining sticky, and internal constraints facing further downward pressure on prices," the future global inflation "still faces the risk of fluctuations."

For inflation in China: The central bank points out that in the first half of the year, "with the continuous economic recovery and stable employment," and "improvement in market supply and demand relationships, the price level is moderately rising." The central bank states that "increased summer travel will drive up service consumption demand, and the fourth quarter is still a traditional peak season for consumption," and "domestic supply and demand will further tend towards balance," in the future, "CPI is expected to continue its overall moderate upward trend, and the decline in PPI will gradually converge." In the medium to long term, "China's economic transformation and industrial upgrading are steadily advancing, supply and demand conditions are expected to continue to improve, monetary conditions are reasonably moderate, residents' expectations are stable, and prices are fundamentally stable."

Signal 3: The monetary policy is basically in line with the statements of the July 30th Political Bureau meeting, the August 2nd central bank work meeting, etc., including "a prudent monetary policy should be flexible and moderate, precise and effective; enhancing the consistency of macroeconomic policy orientation, strengthening countercyclical adjustments," etc. However, there are also many new changes, including reiterating that "a prudent monetary policy should pay attention to balancing short-term and long-term, stable growth and risk prevention, internal balance and external balance," adding "deeply explore effective credit demand, accelerate the transformation of reserve projects," emphasizing "accelerating the improvement of the central bank system, promoting the transformation of the monetary policy framework," adding "preventing interest rate risks," and significantly enhancing the importance of technology in structural policy tools. It continues to emphasize: the current economic downward pressure is not small, insufficient demand is still the core contradiction, achieving the annual target requires policies to "continue to exert force and be more forceful." Specifically on the monetary side, easing is still the general direction, and there is a high probability of further reserve requirement ratio cuts and interest rate cuts during the year.

Firstly, the overall tone of the monetary policy is basically in line with previous statements such as the Central Political Bureau meeting on July 30th and the central bank's work meeting in the second half of the year on August 2nd, including "a prudent monetary policy should be flexible and moderate, precise and effective; enhancing the consistency of macroeconomic policy orientation, strengthening countercyclical adjustments; resolutely preventing the risk of exchange rate overshooting," etc. It is worth noting that this report reiterates the importance of "balancing short-term and long-term, stable growth and risk prevention, internal balance and external balance" in a prudent monetary policy (previously mentioned in the press conference by the State Council Information Office on January 24th), indicating that the current monetary policy is still making "careful choices" under multiple objectives such as stable growth, risk prevention, promoting transformation, and stabilizing the exchange rate Looking ahead for the rest of the year, with the Fed's interest rate cuts in place, the pressure to stabilize the exchange rate is expected to ease marginally. Coupled with increasing downward pressure on the domestic economy, the central bank's policies are expected to tilt towards stabilizing growth. Additionally, this report also adds "deepening the exploration of effective credit demand, accelerating the transformation of reserve projects," indicating that in the context of increased downward economic pressure, the central bank still has a certain demand for credit expansion. Monetary easing is still the general direction, with a high probability of further reserve requirement ratio cuts and interest rate cuts later in the year.

Secondly, compared to the Q1 report, this report emphasizes "accelerating the improvement of the central bank's system, promoting the transformation of the monetary policy framework," adds "emphasizing the improvement of LPR quotation quality, urging financial institutions to adhere to the principle of risk-based pricing, and clarifying the relationship between loan interest rates and bond yields and other market rates," and states "gradually increasing the trading of government bonds in open market operations." Furthermore, in Column 1 "Establishing a market-determined deposit and loan interest rate formation mechanism" and Column 2 "Further improving the market-oriented interest rate control mechanism," it is also indicated that "better play the role of the market interest rate pricing self-discipline mechanism" and "further improve the market-oriented interest rate formation, control, and transmission mechanisms," pointing to the accelerated progress of monetary policy reform in China. According to the speech by the central bank governor at the Lujiazui Financial Forum on June 19, the future evolution of the monetary policy framework mainly has three directions: optimizing the intermediate variables of monetary policy regulation, shifting from quantity-based regulation to price-based regulation; further improving the market-oriented interest rate control mechanism, strengthening the policy position of the 7-day reverse repurchase rate, and gradually clarifying the transmission relationship from short to long-term; gradually incorporating the trading of secondary market government bonds into the monetary policy toolbox, enriching and improving the basic monetary issuance methods.

Thirdly, in terms of risk prevention, it adds "preventing interest rate risks" and states "conducting stress tests on the risk exposure of financial institutions holding bond assets." The central bank also points out in Column 4 "The impact of the net asset value mechanism of asset management products on public investors" that "the annualized return of some asset management products, especially bond-type wealth management products, is significantly higher than the underlying assets, mainly achieved through leverage, which actually poses a significant interest rate risk," indicating the central bank's clear concern about the rapid decline in interest rates (in fact, since April, the central bank has continuously warned about the risk of interest rates falling too quickly). Judging from the recent operations of the central bank, in response to the rapid decline in interest rates, the central bank has shifted from "guidance expectations" to "on-site operations," and short-term bond market volatility may be amplified.

Furthermore, in structural monetary policy tools, support for technology is significantly strengthened, explicitly stating "implementing in-depth the 'Work Plan for Making Solid Progress in Technology Finance,' building a technology finance system that is compatible with technological innovation, and strengthening financial support for national major technological tasks and technology-oriented small and medium-sized enterprises," all of which ultimately serve economic transformation and high-quality development.

Signal 4: The weighted average loan interest rate in the second quarter fell significantly, with residential mortgage rates and corporate loan rates hitting historic lows. The report points out: the weighted average loan interest rate for new loans in June was 3.68%, a decrease of 0.31 percentage points from the first quarter. Specifically, the weighted average loan interest rate for corporate loans was 3.63%, a decrease of 0.1 percentage points from the first quarter, while the interest rate for residential individual housing loans was 3.45%, a decrease of 0.24 percentage points from the first quarter, both reaching historic lows

Signal 5: In terms of real estate, it continues to emphasize "promoting the stable and healthy development of the real estate market" and "making efforts to ensure the effectiveness of the financial policy measures that have been introduced." The overall tone of real estate is still "promoting the stable and healthy development of the real estate market," but it also emphasizes "fully understanding the new changes in the supply and demand relationship of the real estate market, responding to the new expectations of the people for quality housing, and making efforts to ensure the effectiveness of the financial policy measures that have been introduced," basically continuing the wording of the State Council meeting on June 7. Column 3 "Supporting the Sustainable Development of the Rental Housing Industry" points out that recently, the People's Bank of China has improved and introduced refinancing for affordable housing based on the original rental housing loan support plan. Through market-oriented means, it helps achieve three major functions: "first, promote the construction of a new development model for real estate, support the development of the rental housing industry; second, increase the supply of affordable housing; third, work together with the guarantee house and the 'white list' mechanism to reduce the risk level of the real estate market." From the current situation of policy implementation, there is still considerable room for the use of structural monetary policy tools such as refinancing for affordable housing, guarantee house loans, and support plans.

Signal 6: Column 5 "Closely Monitoring the Monetary Policy Trends of Major Overseas Central Banks" points out that "marginal changes in price and employment data create conditions for the Fed to cut interest rates," but "the specific timing of the rate cut will still depend on future data changes," and the "spillover effects of the rate cut are worth paying attention to." The column points out that "the decline in inflation pressure and the softening of employment data have intensified investors' concerns about the slowdown in US economic growth, further enhancing expectations of a Fed rate cut," but considering that "the resilience of the US economy gives the Fed more time to observe," and geopolitical impacts on commodity prices may "drive a rebound in US inflation," the timing of the Fed rate cut still "depends on future data changes." It is necessary to pay attention to the spillover effects of the Fed rate cut in the future. First, the global liquidity environment is improving, which is generally conducive to easing external pressures on emerging market economies; second, when global liquidity faces a turning point, international financial markets may experience corresponding adjustments.

Author: Xiong Yuan, Mu Renwen, Source: Xiong Yuan (ID: gh_b8da3439a34e), Wall Street News columnist, Original Title: "Many New Wordings - 6 Major Signals in the People's Bank of China's Second Quarter Monetary Policy Report"

Xiong Yuan S0680518050004 xiongyuan@gszq.com

Mu Renwen S0680523060001 murenwen@gszq.com