Here is the translation of the provided text into English: At the press conference on financial support for high-quality economic development held by the State Council Information Office, the central bank announced a cut in reserve requirements, interest rates, and a reduction in the interest rates on existing housing loans.
So, what are the considerations behind the central bank's increased easing?
How specifically will real estate-related policies be adjusted?
What is the impact of the reduction in the interest rates on existing housing loans?
Both reserve requirement ratio and interest rate cuts have been implemented, with an increase in monetary easing.
The central bank reduced the 7-day reverse repo rate by 0.2 percentage points to 1.5%, and at the same time, it lowered the reserve requirement ratio by 0.5 percentage points.
On the one hand, domestic demand growth momentum is weakening, and under the background of low price levels, the real interest rate is relatively high; on the other hand, the Federal Reserve's interest rate cut has opened up a monetary cycle at home and abroad.
Considering the reduction in policy interest rates and the interest rates on existing housing loans, the pressure on net interest margins of commercial banks has further increased, and subsequent deposit interest rates may also fall in sync.
The reserve requirement ratio cut at the end of the quarter is mainly for four reasons: first, credit issuance may rise seasonally; second, September is still a peak period for government bond issuance, and special bonds are concentrated in the last week of the month; third, the scale of MLF expiration in the subsequent months will increase; fourth, to reduce the cost of bank liabilities and alleviate the pressure on net interest margins.
In addition, if additional fiscal tools are introduced later, combined with the concentrated issuance of government bonds, the central bank's reserve requirement ratio cut can smooth out fluctuations in the money market, and at the same time, it can increase the operation of buying and selling government bonds in the open market to synergize with fiscal efforts.
The central bank announced the creation of new monetary policy tools to support the stable development of the stock market, which is expected to promote the development of direct financing and alleviate the operating pressure of non-bank institutions such as insurance companies.
How will the interest rates on existing housing loans be adjusted?
The central bank proposed to guide banks to adjust the interest rates on existing housing loans in batches, reducing the interest rates on existing housing loans to a level close to newly issued loans, with an expected reduction of about 50 basis points, benefiting 50 million households and 150 million people, with an average annual reduction in household interest expenditure of about 150 billion yuan.
At the same time, commercial personal housing loans at the national level will no longer distinguish between first and second homes, and the minimum down payment ratio will be unified at 15%.
According to the central bank's estimate, this adjustment of the interest rates on existing housing loans will reduce the annual interest expenditure of borrowers by about 150 billion yuan, slightly less than the 170 billion yuan saved by the reduction in the interest rates on existing housing loans in 2023, indicating a slight decrease in policy intensity.
After this reduction, the weighted average interest rate on existing loans will be reduced from 4.17% to about 3.67%, with a spread of 22 basis points compared to the current weighted average interest rate on newly issued housing loans of 3.45%.
Affected by the cancellation of the lower limit on newly issued housing loan interest rates and two adjustments to the LPR, the interest rates on newly issued housing loans have fallen by about 0.7 percentage points this year, and it will be difficult to significantly fall further, and there is limited space for a large reduction in the interest rates on existing housing loans.
How will it affect the economy and the market?
What is the impact on the economy?
Since 2023, the LPR has continued to fall and is now at a low of 1.54, coupled with the reduction in the interest rates on existing housing loans, it is expected to lead to a 5 basis point decline in the total asset yield of banks.
Therefore, the central bank may guide deposit interest rates to fall further.
This adjustment of the interest rates on existing housing loans will continue to narrow the interest rate spread between new and old housing loans, which may further alleviate the phenomenon of early repayment.
Considering the proportion of consumption expenditure to income last year, it is estimated that this policy will release 150 billion yuan in interest expenditure, which will drive social consumption by 102.5 billion yuan.
However, according to the central bank's statistics, the stimulus effect of the interest rate cut policy on consumption in 2023 only lasted for one month after the policy was released.
Moreover, since 2019, residents' willingness to consume and expectations of income have been declining overall, and the long-term effect of stimulating consumption still needs to be observed.
How will it affect the market?
In terms of the stock market, the support for repurchase and shareholding increase has been strengthened, which is beneficial to high dividend industries; in terms of the bond market, the short-term increase in risk appetite may increase bond market volatility, and with the reduction of the overall social debt cost, there is still downward momentum in the yield on government bonds.
At the press conference on financial support for high-quality economic development held by the State Council Information Office, the central bank announced a cut in reserve requirements, interest rates, and a reduction in the interest rates on existing housing loans.
So, what are the considerations behind the central bank's increased easing?
How specifically will real estate-related policies be adjusted?
What is the impact of the reduction in the interest rates on existing housing loans?
1.
Both reserve requirement ratio and interest rate cuts have been implemented, with an increase in monetary easing.
The central bank announced a reduction of 0.2 percentage points in the 7-day reverse repo rate.
In July, the central bank had already reduced the 7-day reverse repo operation rate from 1.8% to 1.7%, and this time it was further reduced to 1.5%.
On the one hand, since the second quarter, domestic demand growth momentum has weakened, and under the background of a decline in core CPI and PPI growth rates, the real interest rate is still relatively high, and there is a strong need for interest rate cuts; on the other hand, the Federal Reserve's interest rate cut has opened up a monetary cycle at home and abroad, coupled with the recent strengthening of the RMB exchange rate, the space for domestic policy interest rate reduction has opened up.
Considering the reduction in policy interest rates and the interest rates on existing housing loans, the pressure on net interest margins of commercial banks has further increased, and subsequent deposit interest rates will fall in sync, and the LPR rate will also follow the 7-day reverse repo rate to be reduced, in order to promote the reduction of financing costs for the real economy.
The reserve requirement ratio cut releases funds and synergizes with fiscal efforts.
The central bank announced a comprehensive cut in the reserve requirement ratio by 0.5 percentage points, which is the second cut in the year after February, providing about 1 trillion yuan of long-term liquidity to the financial market.
In addition, the central bank also announced that "depending on the situation of market liquidity within the year, it may further reduce the reserve requirement ratio by 0.25-0.5 percentage points at the right time."
From the perspective of financial institutions, first, the credit issuance at the end of the quarter may rise seasonally, and the pressure on the bank's liability side has increased; second, September is still a peak period for the issuance of special bonds, and special bonds are concentrated in the last week of the month, with a large demand for funds; again, the scale of MLF expiration in the subsequent months of the year will increase, especially in November and December, both of which have 1.45 trillion yuan of MLF expiring, and the reserve requirement ratio cut can replace part of the expiring MLF; finally, the reserve requirement ratio cut can reduce the cost of bank liabilities and alleviate the pressure on net interest margins.
In addition, looking at the current rhythm of fiscal revenue and expenditure, there is a revenue gap of about 1.6 trillion yuan for the whole year, and there is still a strong need for the acceleration of existing policies and the introduction of additional policies.
If additional fiscal tools are introduced later, combined with the concentrated issuance of government bonds, the central bank's reserve requirement ratio cut can smooth out fluctuations in the money market, and at the same time, it can increase the operation of buying and selling government bonds in the open market to synergize with fiscal efforts.
Structural monetary policy is increased to support non-bank and stock markets.
The central bank announced the creation of new monetary policy tools to support the stable development of the stock market.
First, it created a swap facility for securities, funds, and insurance companies, supporting qualified securities, funds, and insurance companies to obtain liquidity from the central bank through asset pledges, enhancing the institutions' ability to obtain funds and increase stocks; second, it created a special re-lending for stock repurchase and shareholding increase, with a re-lending rate of 1.75%, and banks can add 0.5 percentage points on this basis, guiding banks to provide loans to listed companies and major shareholders, supporting stock buybacks and shareholding increases.
On the one hand, this move can promote the development of direct financing and increase stock market liquidity; on the other hand, the operating pressure of non-bank institutions such as insurance companies is expected to be alleviated.
2.
How will the interest rates on existing loans be adjusted?
The interest rates on existing housing loans are expected to be reduced by 50 basis points, and the minimum down payment ratio for second-home loans will be reduced to 15%.
At the press conference held by the State Council Information Office, the central bank proposed to guide banks to adjust the interest rates on existing housing loans in batches, reducing the interest rates on existing housing loans to a level close to newly issued loans, with an expected reduction of about 50 basis points, benefiting 50 million households and 150 million people, with an average annual reduction in household interest expenditure of about 150 billion yuan, in order to promote consumption and investment, reduce the behavior of early repayment, and at the same time, compress the space for illegal replacement of existing housing loans.
At the same time, the central bank proposed that in order to better support the housing improvement needs of urban and rural residents, commercial personal housing loans at the national level will no longer distinguish between first and second homes, and the minimum down payment ratio will be unified at 15%.
It is worth noting that the central bank pointed out that each place should adopt policies according to the city, independently determine whether to adopt differentiated arrangements, and determine the minimum down payment ratio limit within the jurisdiction; commercial banks need to determine the specific down payment ratio level in consultation with customers according to the customer's risk status and willingness.
The scale of interest reduction is slightly lower than last year.
The central bank mentioned in the "China Regional Financial Operation Report (2024)" that by the end of 2023, the interest rates on more than 23 trillion yuan of existing housing loans across the country were reduced, with an average reduction of 73 basis points, which can reduce the interest expenditure of borrowers by about 170 billion yuan per year.
However, this adjustment of the interest rates on existing loans is expected to reduce the annual interest expenditure of borrowers by about 150 billion yuan, lower than last year, and the intensity of policy implementation has slightly decreased.
Further reduce the monthly burden on borrowers.
If calculated according to a mortgage loan of 1 million yuan with equal principal and interest repayment, the reduction of 50 basis points in the interest rate on existing mortgages is expected to reduce the monthly payment of borrowers by about 260 yuan.
Specifically, taking the repayment situation of a 1 million yuan mortgage with equal principal and interest over 20 years signed before 2019 in Beijing and Shanghai as an example: in October 2023, some existing housing loan interest rates in Beijing can be executed at the LPR+0BP standard, and the lowest interest rate after adjustment is reduced from 4.85% to 4.2%, saving the borrower about 350 yuan per month; if the existing housing loan interest rate is reduced from 4.2% to the new housing loan interest rate of 3.4% issued by mainstream banks in Beijing, the borrower can save about 420 yuan per month.
In the Shanghai area, assuming the homebuyer has enjoyed the lowest LPR-20BP loan interest rate since October 2019, the impact of last year's policy to reduce the interest rates on existing housing loans is small.
If the housing loan interest rate is reduced from the lowest 4.0% to the new housing loan interest rate of 3.4% issued by mainstream banks in Shanghai, the monthly payment can be saved by about 310 yuan.
The space for subsequent reductions is limited.
According to the central bank's statistics, by the end of 2023, the weighted average interest rate on existing housing loans was 4.27%, considering that the 5-year LPR was reduced by 10 basis points in the same year, the weighted average interest rate on existing housing loans after repricing in 2024 is about 4.17%.
In the second quarter of 2024, the weighted average interest rate on newly issued housing loans was reduced to 3.45%, with a spread of 72 basis points.
This round of interest rate adjustments allows homebuyers and banks to adjust the interest rates on existing housing loans to the level of newly issued housing loans through self-adjustment, eliminating the "stage difference" caused by the fixed repricing time of existing housing loan interest rates, while adjusting the spread of the interest rates on existing housing loans.After a 50BP cut, the weighted average interest rate on existing loans will drop from 4.17% to around 3.67%, reducing the interest rate spread to 22BP compared to the current new mortgage loan weighted average interest rate of 3.45%.
Influenced by the removal of the minimum limit on new mortgage loan interest rates at the national level in May this year and two adjustments of the LPR, the new mortgage loan interest rates have experienced a significant decline.
According to CRIC Research, new mortgage loan interest rates have dropped to an average of 3.2% for the first set and 3.5% for the second set, with a cumulative decline of about 0.7 percentage points within the year, and some cities have seen a cumulative reduction of up to 1 percentage point.
Therefore, it may be challenging for new mortgage loan interest rates to decline significantly in the future.
3.
What are the economic and market impacts?
In terms of economic impact, banks' net interest margins are slightly under pressure, driving down deposit interest rates.
The performance of China's banking industry is still at the bottom of the cycle, with commercial banks' net interest margins maintaining a downward trend since the first quarter of 2023 when they fell below the MPA (Macro Prudential Assessment) requirement of 1.8, and have now dropped to a low of 1.54.
The current reduction in existing mortgage loan interest rates will prompt banks to give up about 150 billion yuan in profits to consumers, accounting for 6.3% of the net profit of commercial banks in 2023, and is expected to lead to a 5BP decrease in the return on bank assets.
To offset the impact of the LPR reduction and the reduction in existing mortgage loan interest rates, the central bank may guide deposit interest rates to fall further, in order to compress the cost of bank liabilities.
Referring to last year's interest rate reduction policy, the four major banks reduced the fixed loan interest rates for 1, 3, and 5 years by 0.1, 0.25, and 0.25 percentage points respectively in the fourth quarter to cope with the pressure of capital profitability.
The phenomenon of early loan repayments is expected to ease.
Early loan repayments put pressure on commercial banks to lose credit, and at the same time suppress residents' daily consumption, which is an urgent problem that the existing mortgage loan policy needs to solve.
According to the central bank's assessment of the effectiveness of last year's mortgage loan interest rate reduction policy, the amount of early repayments of personal housing loans nationwide reached 432.45 billion yuan in August last year, and after the policy was introduced, the average monthly amount of early repayments for mortgages from September to December decreased by 10.5% compared to before the policy was introduced.
However, due to the minimum limit on interest rates after the adjustment last year not being lower than the minimum limit of the city's mortgage loan interest rate policy at the time of loan issuance, the burden of repayment for residents' existing mortgage loans is still relatively heavy, and the effect of easing the phenomenon of early loan repayments is limited, with the RMBS prepayment rate indicator still at a high level at the end of the year.
The current adjustment of existing mortgage loan interest rates further narrows the interest rate spread between new and old mortgages, and the policy effect may be further released.
In the short term, it boosts consumption, and the long-term effect remains to be seen.
Considering that the proportion of per capita consumption expenditure of residents nationwide accounted for about 68.3% of disposable income last year, the policy releases 150 billion yuan in interest expenditure, which is expected to drive social consumption by 102.5 billion yuan.
Last year's reduction in existing mortgage loan interest rates had a significant impact on short-term consumption.
According to the central bank's statistics, after the interest rate reduction policy was implemented on September 25, 2023, the total retail sales of consumer goods nationwide in October of that year increased year-on-year by 0.45%, exceeding the average value of 0.21 percentage points in recent five years, showing a super-seasonal rebound.
However, the boosting effect only lasted for one month, and the sales of social retail goods fell again in November and December.
In the long run, since 2019, residents' willingness to consume and expectations for income have generally shown a downward trend, and under this background, the long-term effect of stimulating consumption still needs to be observed.
In terms of market impact, the support for repurchase and increase in holdings is strengthened, which is beneficial to high dividend industries.
First, the central bank has created a special re-lending for stock repurchase and increase in holdings, supporting the repurchase and increase in stock holdings.
The proportion of financial support provided is 100%, and the re-lending interest rate is 1.75% (the loan interest rate for commercial banks to customers is about 2.25%), with an initial quota of 300 billion yuan, and applicable enterprises are not distinguished by ownership, and it will continue to be implemented if the evaluation is good.
This means that some high dividend industries will have a considerable value return.
Second, the securities regulatory commission emphasizes "establishing a clear direction of rewarding investors and improving the quality and investment value of listed companies".
In terms of market value management, the securities regulatory commission has studied and formulated the "Guidelines for Market Value Management of Listed Companies", which includes requiring the board of directors to attach great importance to investor protection and investor returns, and requiring listed companies to establish a normalized repurchase mechanism arrangement, etc.
In addition, in terms of market basic systems, continue to optimize the institutional rules of various links such as issuance and listing, dividend distribution, reduction, and trading.
In terms of investor protection, resolutely crack down on illegal and irregular behaviors such as financial fraud and market manipulation.
The bond market is still favorable in the short term.
Under the background of the comprehensive implementation of monetary policy, if the fiscal policy is also increased, the expectation of price decline and the current situation of weak financing are expected to be reversed.
For the bond market, the short-term risk preference may increase the fluctuation of the bond market, and under the condition that the financing demand has not been significantly repaired, with the comprehensive reduction of the liability cost of the entity sector, banks, and non-bank financial institutions, etc., there is still a downward driving force for the yield of government bonds.
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