On September 24, 2024, at a press conference held by the State Council Information Office, the People's Bank of China and two other departments jointly introduced the situation regarding financial support for high-quality economic development. The central bank proposed to reduce the reserve requirement ratio and policy interest rates, lower the interest rates on existing housing loans, unify the minimum down payment ratio for housing loans, and newly establish two structural monetary policy tools aimed at the capital market to support the stable development of the stock market. The China Securities Regulatory Commission proposed to guide medium and long-term capital into the market and promote mergers and acquisitions of enterprises. The State Financial Regulatory Administration proposed measures such as enhancing the core Tier 1 capital of large commercial banks. The combination of financial policies will effectively boost the stock and bond markets, with stocks expected to rebound and bonds to continue their bull run.
>> 1. The most proactive financial policy of the year, stocks are expected to rebound, and bonds continue to be bullish
Reviewing the various policy measures announced at the press conference, we believe that this combination of financial policies is actively addressing hot issues such as financing costs, real estate, and the capital market, and is expected to support stable economic growth and improve market expectations. From the perspective of major asset classes, the stock market should not be pessimistic, and it is recommended to actively seize the opportunity for a rebound, focusing on high dividend dividend assets in the context of asset scarcity. In the fixed income field, the bond bull market still has room for continuation, and it is expected that the 10-year government bond yield will generally show a trend of fluctuation followed by a gradual downward trend, and it is difficult for interest rates to rise unexpectedly within the year.
>> 2. After the reserve requirement ratio cut, there will be more cuts; after the interest rate cut, there will be more cuts
Governor Pan Gongsheng announced at the press conference: 1. The reserve requirement ratio will be reduced by 0.5 percentage points, providing about 1 trillion yuan of long-term liquidity to the financial market. Depending on the situation, the reserve requirement ratio will be further reduced by the end of the year, possibly by another 0.25-0.5 percentage points. 2. The 7-day reverse repurchase operation interest rate will be reduced by 0.2 percentage points, from the current 1.7% to 1.5%. Under the market-oriented interest rate mechanism, it will drive the adjustment of domestic market benchmark interest rates, drive the medium-term lending facility to be reduced by 0.3%, and it is expected that the loan market报价 interest rate and deposit interest rates will also be reduced by 0.2%-0.25%.
The combination of a 0.5% reserve requirement ratio cut and a substantial 20BP interest rate cut significantly exceeded market expectations, reflecting the strong policy appeal of monetary policy to actively maintain economic stability and reduce costs for the real economy. It is expected to have a strong driving effect on the expectations of the fundamentals and risk sentiment. Governor Pan also introduced several considerations in the process of adjusting monetary policy: first, to support the development of China's economy; second, to promote a moderate rebound in price levels; third, to balance economic growth and the health of the banking industry itself; and fourth, to maintain the basic stability of the renminbi exchange rate at a reasonable and balanced level. In addition, monetary policy also focuses on the coordination with fiscal policy to support proactive fiscal policy.
The central bank proposed that the MLF will be adjusted by 30BP, with a larger range, or the core consideration is to alleviate the pressure on banks' net interest margins. Compared with the 7-day reverse repurchase and SLF, the MLF has a term of one year and a higher interest rate level. A larger reduction in its interest rate can reduce the medium-term funding costs for banks, which is more conducive to alleviating the pressure on net interest margins. Since this year, operations such as reserve requirement ratio cuts, prohibition of manual interest supplementation, policy interest rate cuts, and reduction of existing housing loan interest rates have all been temporarily slowing down the decline in banks' net interest margins to ensure the sustainability of bank profits for capital replenishment and the sustainability of subsequent bank support for the real economy.
This time, not only the reserve requirement ratio cut and interest rate cut were announced, but also the subsequent reserve requirement ratio cut and interest rate cut arrangements for "within the year" were proposed. This is a major practice of the central bank after the mid-year Lujiazui Forum to "enhance the transparency of monetary policy and improve the credible, normalized, and institutionalized policy communication mechanism." "Within the year" is an expectation guidance with temporal attributes, which helps to stabilize market expectations.
>> 3. Re-lending enters micro-enterprise entities to support stock buybacks and boost the capital market
Governor Pan proposed the creation of a special re-lending for stock buybacks and increases, guiding banks to provide loans to listed companies and major shareholders to support stock buybacks and increases. The central bank's structural monetary policy tools are often focused on supporting key areas and weak links of the national economy such as inclusive finance, green development, and scientific and technological innovation. The new establishment of tools aimed at the capital market this time fully reflects the importance attached to the stability of the capital market.In conjunction with the statement, the implementation of this tool may target high-quality listed company entities. If they are optimistic about their own value and wish to repurchase or increase their holdings of shares but lack funds, banks can provide financial support through this re-lending fund. We believe that the central bank's funds entering micro-enterprise entities through banking institutions will help repair corporate confidence and boost market risk sentiment. The central bank proposed that the first phase of this tool is 300 billion yuan, and if implemented well, additional funds can be added later.
>> Four, Fully Support Financial Stability, Bank Regional Risk Resolution
At the press conference, the Director of the Financial Regulatory Authority, Li Yunze, emphasized the need to "actively promote the reform and risk resolution of small and medium-sized financial institutions, and resolutely avoid the spillover and transmission of risks." At the same time, he announced at the press conference, 1. The country plans to increase the core tier-one capital of six large commercial banks, which will be implemented in an orderly manner according to the concept of "overall promotion, phased and batched, one bank one policy". 2. In areas where high-risk institutions are concentrated, specific reform and risk resolution plans have been formed and are being implemented in a stable and orderly manner according to the "one province one policy" approach.
We believe that the statements made at the press conference reflect the full support for financial stability and the approach to reform and risk resolution. Subsequently, attention should continue to be paid to the sources of capital replenishment for large commercial banks. China's small and medium-sized banks are vast and widely distributed in counties. Each institution has its own characteristics, and the economic development of each region is different. If a "one-size-fits-all" approach is taken to directly clear out individual commercial banks, it is easy to form a risk spillover contagion, which will have a certain impact on the financial market. Therefore, the prevention and resolution of risks in small and medium-sized financial institutions should mainly adopt the approach of reform and risk resolution, such as optimizing equity structure, strengthening corporate governance, and strengthening capital supervision, actively promoting the online repair of small and medium-sized financial institutions, reflecting the principle of establishing before breaking. In the future, as multi-channel capital replenishment for large commercial banks alleviates their capital pressure; and the three major key risks of real estate, local government debt, and small and medium-sized financial institutions are gradually resolved, it is expected that China's financial risks will converge steadily.
>> Five, Reduce the Interest Rate of Existing Housing Loans, Financial Shift to Consumption Concession
As of Q2, the balance of personal housing loans in China is about 37.8 trillion yuan. This reduction in the interest rate of existing housing loans guides commercial banks to reduce the interest rate of existing housing loans to near the newly issued housing loan interest rate, and it is expected that the average decline will be about 0.5 percentage points. According to our estimates, the corresponding amount is about 189 billion yuan. The reduction in the interest rate of existing housing loans is more of a consumption policy, which will directly reduce the monthly interest burden on residents and effectively activate consumption capacity.
Regarding the pressure on the net interest margin of banks, President Pan also paid attention in his speech, pointing out that the impact of this interest rate adjustment on the net interest margin of banks is generally neutral, mainly offset by three ways: first, by reducing the early repayment of loans by residents; second, by releasing long-term low-cost funds to reduce the liability pressure on banks (including providing long-term and short-term funds for commercial banks through reserve reduction, medium-term lending facilities, and open market operations); third, the deposit interest rate may be reduced in the future, but it is more to cooperate with the reduction of the LPR, rather than offsetting the downward trend of the interest rate of existing housing loans, and more reflects the financial concession to consumption.
>> Six, The Down Payment for the First and Second Homes is Leveled, Actively Stabilizing the Real Estate Market
This meeting proposed to reduce the minimum down payment ratio for the second home loan from 25% to 15%. On May 17, the central bank had issued a policy to adjust the minimum down payment ratio for personal housing loans, adjusting the down payment ratio for the first home to not less than 15%, and for the second home not less than 25%. This meeting further leveled the down payment ratios for the first and second homes on the basis of the previous period, setting a new historical low. We believe that the essence of the policy to level the down payment ratios for the first and second homes is to stimulate potential housing demand. By reducing the threshold for buying a house and the initial capital demand, it helps to stimulate market demand and enhance the activity of the real estate market. We expect that the stimulating effect of reducing interest rates and down payments in first-tier cities such as Beijing, Shanghai, Guangzhou, and Shenzhen will be greater, and the recovery of the real estate market in first-tier cities will also significantly drive the recovery of second and third-tier cities, which is of positive significance for stabilizing the real estate market.
In addition, the meeting pointed out that the central bank's support for the 300 billion yuan affordable housing re-lending has been increased from 60% to 100%. Increasing the funding support ratio to 100% means that the central bank will provide stronger financial support, which will help reduce the financing costs of local state-owned enterprises or related institutions and build a more perfect housing security system.> VII. Providing liquidity swap facilities for securities, funds, and insurance to significantly reduce non-bank liquidity risks in the future
Governor Pan proposed the creation of swap facilities for securities, funds, and insurance companies, supporting eligible securities, funds, and insurance companies to obtain liquidity from the central bank through asset collateralization. Specifically, the initial scale of the swap facilities for securities, funds, and insurance companies is 500 billion, and this tool will support eligible securities, funds, and insurance companies to use their own bonds, stock ETFs, and constituents of the CSI 300 as collateral to exchange for highly liquid assets such as government bonds and central bank bills from the central bank. The funds obtained by institutions through this tool can only be used for investment in the stock market.
From this perspective, we believe that the swap facilities, on the one hand, create fundamental conditions for non-bank institutions to obtain incremental liquidity, and on the other hand, when there are rebound opportunities in the stock market, they can enhance leverage capabilities through the cashing out of highly liquid assets.
> VIII. Guiding medium and long-term capital into the market and promoting corporate mergers and acquisitions
After this press conference, the China Securities Regulatory Commission (CSRC) will release opinions to promote medium and long-term capital into the market and six measures to promote mergers and acquisitions (the "Six Articles on Mergers and Acquisitions"). Subsequent core recommendations will focus on the specific content.
1) In terms of guiding medium and long-term capital into the market, this year, regulators have continuously emphasized the need to vigorously promote medium and long-term capital into the market and proposed to establish and cultivate a market ecosystem for long-term investment, and to build a policy system that supports "long-term capital for long-term investment." Specific measures are expected to include the development of equity public funds, optimization of equity fund product registration, promotion of innovation in broad-based ETF and other index products, and further optimization of the policy environment for equity investment by medium and long-term capital such as insurance funds, social security funds, and pension funds. In addition, improving the quality and investment value of listed companies is key to enhancing the inherent stability of the capital market and is the micro-foundation for ensuring the entry of medium and long-term capital.
2) In terms of mergers and acquisitions, as of September 24, 2024, according to Wind data, the total number of reorganization events disclosed by all listed companies in the A-share market this year is 154, an increase of 17.6% compared to the whole year of 2023. Currently, policies supporting mergers and acquisitions are frequently introduced, and market enthusiasm is expected to continue to rise. It is anticipated that future mergers and acquisitions will focus on strategic emerging industries, concentrate on serving new quality productive forces and other key areas, effectively complement the development of venture capital, and cross-industry mergers and acquisitions for transformation and upgrading, as well as acquisitions of unprofitable assets, will continue to emerge, providing a return path for investors in high-quality venture capital assets amid the current slowdown in the IPO process.
> Risk Warning
If the domestic economic trend is lower than expected, it may cause exchange rates and international balance of payments pressures to heat up again; the effect of policy regulation may be less than expected.