1-year 3.65%, 5-year and above 4.3%, as expected by the industry, the LPR (Loan Market Quotation Rate) remained unchanged in May. Since August 5, LPR quotations have remained unchanged for nine consecutive months. The industry believes that LPR has been flat for a long time, mainly related to the MLF (medium-term lending facility) policy interest rate remains unchanged, loan pricing has deviated more from LPR, bank net interest margin is still under pressure and other factors, at present, LPR quotation has no corresponding room for downward adjustment, subsequently, the overall loan interest rate or stable.

The three factors behind "Nine Consecutive Pings"

On May 5, the National Interbank Lending Center authorized by People's Bank of China announced that the loan market quotation rate (LPR) on May 22, 2023 is: 5.22% for 1-year LPR and 3.65% for LPR over 5 years, and both types are consistent with before.

It is worth mentioning that since August 2022, LPR quotes have now been flat for 8 consecutive months. Wen Bin, chief economist of China Minsheng Bank, analyzed factors at multiple levels to Beijing Business Daily reporters. First of all, LPR quotations for 9 year and more than 5 years continued to "stand still" in May, and the core factor remained unchanged in the MLF interest rate in the month, so that the pricing basis of LPR quotations remained unchanged.

Because after the LPR reform was implemented in August 2019, the LPR quotation is equal to "MLF interest rate + plus points". The MLF interest rate acts as the anchor rate of LPR quotes, and its changes will have a direct and effective impact on LPR. For example, looking at past quotations, there have been 8 changes in LPR since August 2019. Among them, 8 times achieved the linkage reduction of MLF interest rate and LPR quotation; In three cases, the comprehensive financing cost of banks was reduced by means of RRR reduction and deposit rate pricing reform under the condition that the MLF interest rate remained unchanged, and the LPR was reduced to varying degrees.

"This shows that changes in the central bank's policy interest rate will have a more direct impact on changes in LPR; At the same time, in addition to the MLF policy rate, the impact of bank cost and loan demand on the increase will also be comprehensively considered. Wen Bin said.

Secondly, loan pricing is affected by the relationship between credit supply and demand, and there is currently a lot of LPR, and there is no need to continue to reduce LPR to promote price reduction.

For example, since last year, loan interest rates have fallen rapidly, and there have been many departures from LPR; Although the decline in loan interest rates in the first quarter of this year has slowed down, it is still in a downward channel and has not seen an inflection point. Wen Bin believes that under the background of loan repricing at the beginning of the year and the continued decline in the interest rate of newly issued loans, the net interest margin of commercial banks has further come under pressure. If the cost of credit is further reduced, it is possible that the overall net interest margin of commercial banks will fall below the warning line, and the potential pressure and risk cannot be ignored.

In addition, in terms of market-oriented liabilities, since the beginning of this year, the phenomenon of deposit regularization has remained serious, and the cost of core liabilities has remained high. At present, the effect of lowering the deposit rate is relatively limited, and the stability of LPR quotations can also make the effect of controlling the cost of core liabilities better.

"Unchanged" is also the meaning of policy

Zhou Maohua, a macro researcher at the financial market department of China Everbright Bank, told Beijing Business Daily that LPR has remained stable for a long time, which is actually in line with market expectations. In addition to the stable MLF interest rate as the anchor of LPR in May and the increase in the pressure on the net interest margin of some banks in recent years, the performance of new credit and social finance from January to April was strong, and the new credit of enterprises continued to increase year-on-year, which also reflects that the current market interest rate is at a reasonable level. Overall, the short-term LPR reduction threshold is still high.

In addition, observing the latest policy statement, compared with the requirements of the fourth quarter monetary policy implementation report last year to "promote the reduction of corporate financing and personal consumer credit costs", the recently released monetary policy implementation report for the first quarter of 2023 proposed for the first time to "maintain the interest rate level reasonable and moderate", and continued the expression of the first quarter monetary policy meeting "promoting the steady reduction of comprehensive financing costs and personal consumer credit costs of enterprises".

Wen Bin believes that this also shows that the central bank has both the overall consideration of promoting the continued decline of loan interest rates, and the internal motivation to keep interest rates at a reasonable and moderate level, and the current need for further decline in loan interest rates is very low and the space is greatly narrowed.

"With the early loan interest rate having fallen sharply and the net interest margin of many banks approaching the warning line, protecting the bottom area of the loan interest rate level, guiding the reduction of bank debt costs, and protecting the net interest margin space of commercial banks have also become important tasks for the central bank." Wen Bin said.

Talking about the impact of LPR's long-term unchanged on the property market, Zhou Maohua believes that the current pace of real estate recovery is slow, there are monthly fluctuations and regional recovery is uneven, but the overall real estate is showing a positive recovery trend, and confidence in the property market is gradually picking up; It is expected that in the future, all localities will continue to implement city-specific policies and precise regulation and control, and make good use of policies to stabilize the property market, including the dynamic adjustment mechanism of the first home loan interest rate, to promote the return of real estate to a stable and healthy development track.

or more rely on "targeted rate cuts"

Under the constraints of factors such as net interest margin, the industry believes that the central bank may rely more on structural monetary policy tools to achieve "targeted interest rate cuts", taking into account structural adjustment while reducing costs, and achieving differentiated and precise support.

For example, under the principle of "advance and retreat", in January this year, the central bank set up two new real estate policy tools, namely 1 billion yuan of special re-loans for housing enterprise relief and 800 billion yuan of rental housing loan support plan, for projects and loans that meet the requirements, the central bank will provide financial support according to 1000% of the actual investment funds and 50% of the loan principal, and the interest rate is 100.1%, helping to stabilize real estate and promote transformation with low-cost funds.

The dynamic adjustment mechanism of the first set of housing loan interest rate policies introduced at the beginning of the year also stabilizes the smooth operation of the real estate market, increases the precision of property market regulation and control, and avoids obvious uneven hot and cold phenomena in various places.

Wen Bin believes that the important factor that triggers the subsequent interest rate cut is still the sustainability of economic and financing repair. If the slope of consumption recovery is less than expected, it is difficult for the real estate chain to continue to achieve a virtuous circle, the long-term investment momentum is weak, private investment continues to decline, and the credit recovery of the residential sector recurs repeatedly, etc., the possibility of a slight interest rate cut may still be ruled out during the year.

"However, the continued reduction of LPR will mainly depend on the performance of bank interest margins." In addition to relying on the reduction of the policy interest rate, the most important thing is to match the improvement of the debt side to ensure that the net interest margin of banks remains at a relatively stable level. Wen Bin added.

Zhou Maohua also pointed out that although the LPR remains stable, it is expected that the central bank will encourage financial institutions to tap the potential of LPR reform, encourage financial institutions to actively manage liabilities, and may stabilize the cost of bank liabilities through structural tools or RRR reductions, guide financial institutions to support the weak links of the real economy, and focus on key emerging areas such as infrastructure, manufacturing, green development, and science and technology enterprises.

Looking forward to the follow-up monetary policy, Pang Ming, chief economist and director of the research department of JLL Greater China, said that in order to maintain the positive changes in the macroeconomic upward trend, it is necessary to solve the short-term difficulties such as weak endogenous power and insufficient demand in economic operation, adhere to the long-term policy direction of economic transformation and upgrading, and promote high-quality development. While strengthening coordination with fiscal and industrial policies, we will also focus on structural policy tools, focus on key points, be reasonable and moderate, advance and retreat, and maintain directional, precise and sustained efforts. At the same time, he expects to promote the steady reduction of corporate comprehensive financing costs and personal consumer credit costs by adopting the "reduction principle" and appropriately moving closer to "sound intuition", and there is still a need to cut interest rates and reduce RRR within the year.

Beijing Business Daily reporter Liu Sihong