HTSC: High probability of reserve requirement ratio cut landing, probability of adjustment in stock mortgage loans increasing

Event

On September 13th, the central bank released the financial data for August 2024:

(1) New RMB loans of 900 billion yuan, market expectation 885 billion yuan, previous value 260 billion yuan.

(2) Total social financing of 3.0298 trillion yuan, market expectation 2.7044 trillion yuan, previous value 772.4 billion yuan.

(3) M2 year-on-year growth rate 6.3%, market expectation 6.3%, previous value 6.3%; M1 year-on-year growth rate -7.3%, previous value -6.6%; M0 year-on-year growth rate 12.2%.

The August PMI was 49.1%, with a significant decline in the mid-month bill rate, indicating that the reality of weak financing demand has not changed. Overall credit and social financing data were within market expectations, but the M1 growth rate further declined from July, indicating that the phenomenon of deposit decoupling may still be ongoing. Specifically:

First, total credit growth is less than expected, bill financing continues

In August, new RMB loans increased by 900 billion yuan, a year-on-year increase of 460 billion yuan, at a relatively low level compared to the same period in previous years, mainly supported by bills. In August, there were signs of accelerating economic trends on a month-on-month basis, overall weak price signals, and the continuous evolution of the real estate-fiscal-consumption chain, all of which constrained loan demand. Against this backdrop, bills once again became the main tool for boosting loans, with bill financing increasing by 197.9 billion yuan year-on-year.

Second, structurally, corporate loans weaker than retail loans

In August, non-financial corporate loans increased by 840 billion yuan, a year-on-year decrease of 108.8 billion yuan. Short-term loans and medium-to-long-term loans increased by -190 billion yuan and 490 billion yuan respectively, with year-on-year changes of -149.9 billion yuan and 154.4 billion yuan. In August, the industrial sector's capacity utilization rate was weaker than seasonal, and the year-on-year growth rate of the PPI continued to decline, indicating that under the constraint of corporate profit, the overall business sentiment on the corporate side was not high. Traditional industries such as real estate and infrastructure performed generally, with relatively constrained corporate financing demand.

Household loans increased by 190 billion yuan, a year-on-year decrease of 202.2 billion yuan. Short-term loans and medium-to-long-term loans increased by 71.6 billion yuan and 120 billion yuan respectively, with year-on-year decreases of 160.4 billion yuan and 40.2 billion yuan. The two main logics constraining the growth of household credit from the previous period continue:

First, the high interest rates on existing mortgage loans and the continuous reduction of interest rates on new loans have increased early repayment behavior for household loans. Second, weak real estate sales and inefficient transmission from second-hand houses to new houses have constrained the growth of medium-to-long-term loans. Looking ahead, the policy of lowering interest rates on existing loans is expected to be implemented, but the performance of the traditional "Golden September" is average, and the improvement in household credit is not expected to be significant.

Third, non-standard financing increased slightly year-on-year, government bond issuance supported the growth of social financing

In August, new credit in the social financing category was 982.9 billion yuan, a year-on-year decrease of 338.2 billion yuan. Non-standard financing was 116.1 billion yuan, a year-on-year increase of 15.6 billion yuan. High-frequency data for August showed a continued decline in real estate construction and a slight recovery in infrastructure construction, but the overall real estate and infrastructure sectors still exhibit a weak supply-demand pattern, constraining the growth of non-standard financing In August, the year-on-year increase in entrusted loans was an unusual support item, mainly due to the shift of some local government financing platforms' bond financing needs to off-balance sheet. However, the year-on-year increase in undiscounted bills was less by 47.8 billion yuan. The scale of on-balance sheet bill financing in August was relatively high, showing a certain inverse relationship with undiscounted bills.

Corporate bond financing in August was 169.2 billion yuan, a year-on-year decrease of 109.6 billion yuan. Local government bonds (Wind caliber) had a net financing of approximately -70 billion yuan in August, turning into net repayments again. On one hand, the secondary market for credit bonds fluctuated, causing issuance costs to rise and leading to the cancellation of issuance plans by some local governments.

On the other hand, even after excluding the factor of canceled issuances, there was still a significant decrease in local government bond issuances in August. The purposes of local government fundraising are still under strict supervision, the ratio of borrowing new funds to repay old debts is increasing, and broad fiscal efforts still require further support from the central government. In September, local government bonds will face another peak of maturities, potentially continuing the trend of net repayments. Real estate bonds (CSRC caliber) had a net financing of around 7 billion yuan in August, with the total issuance volume significantly increasing from the previous month. The scale and scope of bond issuances by private real estate enterprises increased, ABS issuance amount increased month-on-month, and there may be some financing support from the supply side, but the key lies in the sustainability of sales-side recovery. The real estate sales performance in the traditional peak season of September is lackluster, and attention is on whether there will be further tightening of real estate policies.

Government bond financing in August was 1.613 trillion yuan, a year-on-year increase of 437.1 billion yuan, serving as a major support for social financing. The issuance of local special bonds accelerated in August, but the actual implementation has not effectively followed through, and M1 growth has not shown signs of recovery. Continued attention is needed on the implementation of funds. In addition, the Standing Committee of the National People's Congress did not mention fiscal matters in September, indicating that policies still maintain strong stability. However, the window of opportunity has not closed, and attention is on whether the trend of economic data will drive the implementation of fiscal tools.

Fourth, M1 continues to decline year-on-year, government deposit expenditures are slow

Based on the low base from last year, M1 in August continued to decline year-on-year to -7.3%, a decrease of 0.7 percentage points from the previous month. Despite the support from summer travel for consumer services, the real estate chain is still operating at a low level, with new home sales bottoming out and a marginal decline in the heat of second-hand home transactions. Overall, M1 reflects that the vitality of the real economy is still at a relatively low level.

Furthermore, the aftermath of manual interest rate cuts has not subsided, coupled with the deposit rate cut at the end of July, leading to some demand deposits transitioning to time deposits, and time deposits flowing into wealth management products and other non-bank institutions, causing certain disturbances to M1. This can also be verified by the year-on-year increase in non-bank deposits and the year-on-year decrease in corporate deposits. M2 in August grew by 6.3% year-on-year, remaining unchanged from the previous month. On one hand, weak loan demand and the accelerated issuance of government bonds have brought significant pressure on deposits, affecting the ability to generate deposits. On the other hand, the impact of deposits moving to non-banks still persists.

In terms of deposit structure, in August, household deposits decreased by 77.7 billion yuan year-on-year, non-financial corporate deposits decreased by 539 billion yuan year-on-year. Non-bank financial institutions' deposits increased by 1.3622 trillion yuan year-on-year. After the deposit rate cut, a considerable amount of funds flowed from bank deposits to non-bank institutions. Additionally, fiscal deposits in August increased by 558.7 billion yuan year-on-year, mainly due to the accelerated issuance of government bonds in August, indicating a slightly slower pace of fiscal expenditures The noteworthy point is that this time the central bank has made a rare interpretation of the monthly data. The central bank stated, "It will adhere to a supportive monetary policy stance to create a favorable monetary and financial environment for economic recovery and improvement. At the same time, it will increase regulation intensity, accelerate the implementation of financial policy measures already introduced, and start to introduce some incremental policy measures... further reducing the financing costs for enterprises and residents."

We believe that the central bank's statement at this time is aimed at avoiding excessive interpretation of the data by the market and conveying an attitude of stabilizing growth and expectations through monetary policy.

On the other hand, it also indicates that a reserve requirement ratio cut is likely to be implemented, while an interest rate cut may depend on the economic data for August-September and the decisions of the Federal Reserve. Especially with consumer spending needing a boost and the high level of early repayment of loans, the probability of implementing adjustments to existing mortgage loans has increased. However, the extent of the adjustment still needs to consider the level of banks' net interest margins. From a controllability perspective, the difficulty of implementing the conversion of existing mortgage loans into adjustable-rate loans remains high.

Market Insights

Overall, compared to market expectations, the financial data for August is not bad, and the support of finance to the real economy is not weak. However, considering the PMI, inflation, and real estate data for August, the economic trend on a month-on-month basis has not yet reversed.

The current economic problems are difficult to solve solely through monetary policy, facing challenges such as transmission mechanisms in monetary policy. With weak willingness to leverage among enterprises and residents, fiscal efforts are essential, and attention can still be paid to October. Recently, the frequency of statements from the central bank has increased, seemingly increasing pressure to stabilize growth. Coupled with the imminent interest rate cut by the Federal Reserve and the lack of signs of fiscal policy background, the exceptionally strong performance of 1-3 year government bonds has led to a comparison effect on medium and long-term interest rates, with the bond market overall showing a bias towards strength, and the 10-year government bond yield has already fallen below 2.1%.

In the short term, the bond market is still in a trend-following state. We believe that the probability of a reserve requirement ratio cut and adjustments to existing mortgage loans is increasing, with no mention of fiscal tools by the Standing Committee of the National People's Congress. If adjustments are made to existing mortgage loans, the pressure on banks' net interest margins will be greater, and there will also be downward pressure on deposit rates, which is positive for the bond market.

However, the odds of 2.0-2.1% are already low, and whether interbank certificates of deposit can open up space is crucial. The possibility of fiscal efforts in October cannot be ruled out, the cost-effectiveness of chasing long-term bonds is not high, and it is recommended to consider certificates of deposit and 5-7 year government bonds. After the implementation of reserve requirement ratio cuts and interest rate cuts, it may be considered to realize some profits from long-term interest rates and guard against subsequent disturbances.

Author: Zhang Jiqiang (S0570518110002), Wu Yuhang, Wu Jing, Ouyang Lin; Source: Huatai Securities Fixed Income Research; Original Title: "Huatai Fixed Income: Focus on Possible Incremental Monetary Policy - August Financial Data Review"