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Analyst’s opinion: China’s LPR has been flat for July, and market interest rate hiking expectations are starting to emerge, but it’s hard to come by | Reuters


Reuters, Shanghai, November 20-November China China loan market (LPR) quote rate remained flat for the seventh month in a row. Contrary to the previous consensus that LPR and other policy interest rates will be stable and not rule out small drops, due to the recent impact of credit risk events on market interest rates, the market has seen signs of rising interest rates such as LPR. However, in general, China’s current economic environment does not yet have such radical policy adjustment conditions, and the possibility of remaining in the observation phase is still very high.

Profile photo: September 2018, Beijing, People’s Bank of China HQ. REUTERS / Jason Lee

The November LPR quotation released by People’s Bank of China on Friday showed that the one-year period is 3.85%, and the interest rate of products with a five-year period and above is 4.65%, which is the seventh consecutive month.

A Reuters survey of 36 financial institutions on Thursday showed that, after six consecutive months of flatness, nearly 90% of respondents expect to remain unchanged this month. However, this survey is slightly different to the previous one. China has raised expectations for LPR, accounting for more than 10%.

Here are analysts’ comments:

–Zhang Xu, Chief Analyst at Everbright Securities Bonds:

With the rise in bond market yields, some investors have come to expect LPR to raise interest rates. However, we believe that not only will LPR not raise interest rates in the next phase, but that the one-year variation will further cut interest rates. After reforming the LPR, the two tracks in the original “dual track loan interest rate system” merged into a new track: MLF – LPR – real loan interest rate. This chain weakens the role of bond market interest rates in transition. Thus, the periodic fluctuations in bond market interest rates will not reverse the general trend of LPR and real interest rates on loans falling.

Certain recent credit events have undoubtedly led to a rapid rise in bond yields. If the event is to further ferment, it could affect the reasonable future profit distribution of financial institutions. We have noticed that, at the start of the event, the central bank had definitely injected enough liquidity into the market, but the liquidity policy could not “cover the world”. Whether the relevant credit event can be properly resolved is the core factor affecting the development of the situation.

Unlike the large number of interest rate cuts since the fourth quarter of last year, the incentive for future LPR interest rate cuts will become more of a progressive pressure drop rather than a decline in MLF interest rates. The size of the increase depends largely on factors such as the cost of each quoting bank, the supply and demand of the market, and the risk premium.

–Luo Yunong, fixed income analyst at Industrial Securities:

Central bank leaders have stressed the continued prevention of financial risk, and it is difficult for LPR to fall, but the default risk has not subsided, and it is not a good time to raise interest rates.

The leverage has been increased too quickly this year. The central bank now wants to stabilize the leverage ratio first. Therefore, credit conditions are likely to be tightened in the future, and financial conditions are expected to match. Therefore, the likelihood of future interest rate hikes is definitely greater than interest rate cuts.

From an LPR perspective, LPR is MLF’s interest rate and point determination. The point plus a commercial bank depends on the cost of debt and risk premium. Currently, the MLF interest rate remains the same, while the DR007 deposit interest rate and interest rate certificate are rising, and the recent credit default events are also rising. As a result, the risk premium has risen, so the increase in banks is also under pressure.

The bank’s independent quote is in line with the central bank’s market prices; central bank director Sun has said the current interest rate of the loan is appropriate and does not need to be reduced. The increase in LPR does not at least break the policy direction of the central bank.

— Chief Analyst Macro Wang Qing / Senior Analyst Feng Lin:

On the 16th of this month, the central bank’s MLF year-over-year interest rate remains unchanged, meaning the reference basis for LPR quotes in November remains unchanged. Since September last year, the spread between the one-year LPR and one-year MLF interest rates has been set at 90 basis points.

Since August, short-term market interest rates have not risen sharply, but the interest rate of interbank issue certificates has continued to rise significantly in the same period. This hedges against the impact of lowering the cost of liabilities such as banks’ structured deposits and large certificates of deposit. In the near future, banks have a certain upward pressure on the average marginal cost of funds, and the quoting banks do not have sufficient incentive to reduce their LPR quotes in November.

In addition, the underlying reason for the continued flatness of LPR quotes lies in the “V-shaped reversal” of the macro economy during this period, which means that there is no demand for lowering policy interest rates in the short term. Monetary policy has entered an “observation period”, with more emphasis placed on steady growth and Keep a good balance between risk prevention.

We expect that LPR quotes for the year before the year end will remain stable, and the trend of corporate loan interest rates and residential mortgage interest rates may divert further. However, the market-wide short-term interest rates will remain steady state around small fluctuations in short-term policy interest rates since August, and the “tight currency” is showing signs of easing.

It is worth noting that the current regulators are strengthening the macro-prudential management of real estate finance. If house prices continue to rise rapidly, the five-year LPR quote can be raised for separate housing loans, meaning that there will be corporate interest rates and future residential housing loans. Diverting interest rate trends can intensify.

** Related background **

– Guo Shuqing, secretary of the China Central Bank Party Committee, recently stated that the huge achievements and remaining problems in domestic technological innovation should be viewed in a comprehensive and objective way, the requirements for coordinated development and security should be implemented , financial stability should be maintained effectively, and systemic risks should be avoided. The bottom line.

– To ease financial market tensions caused by credit bond defaults such as Yongmei Holdings, the central bank’s open market on Monday (16th) November hit operations five years higher, but the operating rate of 800 billion yuan is get her hedges. After the period, the net increase was lower than last month. The economy remains strong. Although local financial risks are emerging, the central bank will still try to strike a balance between risk prevention and currency stabilization before spreading.

Zhou Chengjun, director of the People’s Bank of China’s Financial Research Institute, said Wednesday that there is little room for lower interest rates, which also provide some theoretical support for the central bank to maintain a normalized monetary policy.

– Should the supporting policies introduced during the epidemic be withdrawn? Liu Guoqiang, deputy governor of People’s Bank of China, said earlier that the international consensus is that exit is necessary, but the timing and mode of exit need to be carefully evaluated. China’s economy is generally better than the international. The next step is to maintain a tight and moderate monetary policy. Based on an accurate assessment of economic conditions, there should be no “policy cliff”.

– China’s economy continued to rebound in growth in October, the industry expanded faster than expected, and consumption and investment growth rates are both setting new highs for the year. Some imbalances in the previous economic operation have also been improved, consumption has been restored, and the growth of the service industry is also rising. China’s growth rate in the fourth quarter will accelerate further compared to the third quarter. (Finish)

Li Hongwei Organizing; review Zhang Xiliang

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