There were rate cuts in China on Monday. String pushin’.
If you long ago gave up trying to understand which rate is the “key” rate in China, who sets it and when, you’ll be forgiven.
Here’s a flash test for the “pros” among you: Which rate’s the Chinese policy rate and where is that rate currently?
If you can answer that, congratulations: You have no life. I’m just kidding. But congratulations are in order. Because if I asked that question to 100 Wall Streeters at random, and I didn’t accidentally get a China strategist in my sample, I dare say not a single one of them could answer it correctly off the top of their heads, and certainly not at 8:00 AM, hungover in the twilight zone between the last line from yesterday’s eight ball and the first key bump from today’s, which is still several torturous hours away.
The answer is the seven-day reverse repo rate, and it’s 1.5% after being lowered by 20bps last month in Pan Gongsheng’s rate-cut blitz. The answer used to be the one-year MLF rate, which was cut by 30bps in late September. That rate — the one-year MLF rate — was the base rate off which banks priced loans to their best customers. The rate on those loans is the one-year loan prime rate, LPR for short. A longer-tenor version — the five-year loan prime rate — is linked to Chinese mortgages.
Got all that? Nope. Great.
Unfortunately, “serious” market participants are compelled to stay apprised of developments in this convoluted, multi-tiered, system, particularly now given that the fate of the universe allegedly hinges on the success (or, more likely, the failure) of China’s stimulus push.
On the bright side, LPR cuts are pretty straightforward. Or at least they used to be. Since August 2019, when the PBoC “simplified” the system with the introduction of the LPRs, a cut to the one-year MLF rate on or around mid-month generally meant banks would lower the rate on at least the one-year LPR tenor on the 20th of the month. The PBoC introduced some ambiguity earlier this year, when they backburnered MLF in favor of the seven-day reverse repo rate, but suffice to say LPR cuts in October were a foregone conclusion given recent reductions to the repo rates the one-year MLF.
Monday’s LPR cuts split the difference between last month’s 20bps repo rate cut and 30bps MLF cut. The 25bps reductions to both the one- and five-year LPR tenors were the largest ever outside of a 25bps cut to the longer-tenor in February, an anomalous move which presaged months of increasingly desperate efforts to revive the property market.
I realize that chart is — how should I put this? — hard to look at. But what can I do? I didn’t create China’s system and be thankful: I could’ve made it even more complicated. There’s a 14-day repo rate too, and don’t forget about the RRR, which is (or at least used to be) different depending on the size of the bank.
As Bloomberg reminds you, the majority of new credit in China, as well as the outstanding loan stock, is priced on the one-year LPR. And again, mortgages are priced on the five-year.
Guess what? The price of credit’s irrelevant if there’s no demand for it at any price. The PBoC and Chinese lenders can cut rates as much as they want and it’s not going to move the needle until consumer sentiment improves.
It’s interesting that the PBoC has issued specific instructions prohibiting the illegal use of credit for investment in the equity market. This indirectly addresses the question many individuals have about whether they should invest their hard-earned money.
Can you elaborate? I don’t follow China enough to know what that means.
One could obtain credit at, say, the one-year MLF rate, but the margin rate from brokers is significantly higher. In a country with thousands of years of gambling tradition, it’s easy to predict what might happen: loans applied for one purpose, such as ‘xyz,’ are actually used for equity trading instead. As a result, the PBoC has issued a warning that credit must not be illegally diverted into A-share markets.
I guess the government wants companies to buy shares back to lift prices, but not encourage margin trading by investors?
To me, all lip service. I guess there might be one to two stupid enough co. will buy back. It’s doomed from the very beginning in 1990s, which should never exisit in the governance system: You are not a shareholder despite of holding co. shares! (rsch some background of the A-share, B-share, H-share structure if one is interested in)
Thanks for the chart. I think Chinese new mortgage rates must now be at or below 3%? PBOC has pushed banks to lower rates on existing mortgages (4%-ish) to the new mortgage rate. That latter move should be a fiscal stimulus on $5TR of existing mortgages, of $25-50BN depending on whether banks are compelled to keep repricing existing mortgages with each cut to the new mortgage rate.
PBOC seems to be the government entity most effectively executing stimulus.
I wonder if publicly out-performing as a top-level government official is good or bad for career prospects, in Xi’s CCP?
Also, please run your “excess savings” down to zero and take on debt to finance everything from major purchases to groceries and tee shirts. It’s the American way!