After The Interest Rate Cut, We Still Need To Resolutely Reduce The Capital Outflow Caused By Hedging Depreciation.

The CICC team believes that instead, a resolute monetary policy in place will ease the operation time and operability of arbitrage funds so as to effectively avoid continued capital outflow. Monetary policy can really play a role of relaxation rather than offset by outflow of funds. As a result, interest rate cuts are still not enough, and more resolute scaling is needed to hedge against the outflow of capital from the devaluation, while actively guiding the downward trend of money market interest rates and driving down the overall interest rate.

In February 28, 2015, the people's Bank of China announced that the RMB lending and deposit benchmark interest rates of financial institutions should be lowered from March 1, 2015. In this regard, CIC fixed income research team Chen Jianheng, Fan Yangyang and Tang Wei released a research report on the 1 day, saying that the depreciation of the original yuan was due to the relaxation and relaxation of monetary policy. Now, instead of loosening expectations, the capital side has become more intense, forming a paradox. The CICC team believes that instead, a resolute monetary policy in place will ease the operation time and operability of arbitrage funds so as to effectively avoid continued capital outflow. Monetary policy can really play a role of relaxation rather than offset by outflow of funds. As a result, interest rate cuts are still not enough, and more resolute scaling is needed to hedge against the outflow of capital from the devaluation, while actively guiding the downward trend of money market interest rates and driving down the overall interest rate.

In February 28, 2015, Beijing ushered in the first snow after the Spring Festival. It was auspicious for a long time. On the contrary, the central bank announced that the interest rate cut again after November last year is the first comprehensive relaxation since the new year. The benchmark lending rate for the one-year loan has been lowered by 0.25 percentage points to 5.35%; the one-year deposit benchmark rate has been reduced by 0.25 percentage points to 2.5%; at the same time, in combination with advancing the interest rate marketization reform, the upper limit of the floating interval of the deposit interest rate of the financial institutions has been adjusted to 1.3 times that of the deposit benchmark interest rate 1.2 times.

There is no need to mention the background of this rate cut. The continued decline in monetary growth, economic growth and inflation means that the direction and meaning of monetary policy more emphasis on tightness and moderation is to continue to relax. We have mentioned this many times in our previous reports.

But the real push for the central bank to make a firm decision to cut interest rates in February should be continued downward inflation and the risk of deflation. In January, CPI dropped to 0.8%. We estimate that CPI may be only about 0.9% in February, and the average level in two months is less than 1%, which continues to decline compared to the fourth quarter of last year. After deducting food and energy, the core CPI has also continued to slide in recent months. The retail price index (RPI), which has little market concern, has also dropped to -0.4% in January (0.36% in December). Judging from this index, deflation can be said. In another step, it can be said that the risk of deflation has increased. In an environment of low inflation, rising real interest rates will inhibit consumption and investment demand, and we must guide real interest rates to fall by easing monetary policy loosening. This point has been emphasized since the fourth quarter of last year.

The interest rate cut was slightly smaller than that in November 2014. In terms of loans, the terms of each period decreased by 25bp, the last time it was down by 15-40bp. In terms of deposits, except for the current benchmark interest rate, the deposits in other periods decreased by 25bp, consistent with the previous decline. At the same time, all floating intervals extend from 1.2 to 1.3 times. Considering 1.3 floating up, the 3-4bp is lower than the last rate (up to the top).

According to the monetary policy implementation report of the fourth quarter of last year, the interest rate for demand deposits rose only 1.06 after the interest rate cut last November. The average weighted interest rate of deposits in each period is about 1.17 times that of the benchmark interest rate. Assuming that the floating rate is still 1.06, and the average floating rate is 1.25, the interest rate of the interest rate cut will probably decrease by about 6BP. Assuming that the average interest rate is only 1.2 on a regular basis, the deposit interest rate may decrease by about 14BP, and the cost of capital may decrease more significantly. Considering that interest rates for floating space and demand deposits remain unchanged, this is still asymmetric interest rate reduction, but the rate of interest rate reduction is not as large as last time.

Moreover, unlike the interest rate cut in November last year, because many loans, especially residential mortgage loans, are generally priced at the beginning of the year, the interest rate adjustment of many stock loans will not be realized until next year after the interest rate cut. Therefore, the actual rate reduction effect is weaker than the last one, and more is just a signal and a boost of confidence. After the last rate cut, the volume of real estate transactions was stimulated at the end of last year. But since the beginning of the year, the volume has slowed down. We expect that the demand will be reduced in the early stage, plus the rate of interest reduction is not the same as last time. But overall, interest rate cuts still help stabilize market confidence and increase consumption and investment demand.

However, for the market and the real economy, the bigger obstacle is that although the central bank has relaxed gradually since November last year, the interest rate of money market has not risen. With the increase of relaxation expectations, the expectation of depreciation and the pressure of devaluation will follow. Especially in December of last year, when the market expected higher interest rates in the United States, coupled with China's relaxed expectations, there was a significant devaluation of the renminbi. In the middle and last 12 months of last year, the monthly depreciation rate of RMB reached 20%, even if the mobile average reached 13%. The depreciation rate is in the second place in history, second only to the one round of depreciation in March 2014.

The consequences of the depreciation are obvious. Last December and January this year, foreign exchange holdings were negative. The demand for foreign exchange in the market has increased significantly, and funds have been accelerated. The interbank lending rate in Hongkong has risen sharply since last December, and the 3 month lending rate even rose to a record high of more than 5%. Interest rate swaps based on 3 month lending rates continue to rise. Even the interest rates for certain periods are already higher than the domestic ones. This is very rare in history.

Originally, the depreciation of the renminbi originated from the relaxation and relaxation of monetary policy. Now, on the contrary, under the impetus of easing expectations, the capital side has become more intense, forming a paradox. This time, the depreciation of the renminbi is more driven by the expectation of relaxation rather than the actual effect of relaxation. The market is in the front, and the monetary policy is behind the curve. Relaxation has become a backward type of forced relaxation. If we adopt this slow lagging monetary policy and relax the time window, the outflow of funds will be as difficult as the massive inflow of RMB appreciation funds, which will continue to restrict the domestic capital market. Instead, a resolute monetary policy in place will ease the operation time and maneuverability of these arbitrage funds so as to effectively avoid continued capital outflow. Monetary policy can really play a role of relaxation rather than offset by outflow of funds.

Therefore, it is still not enough to cut interest rates, and we still need to be more resolute. Drop accuracy To hedge against the capital outflow caused by devaluation, and actively guide the downward trend of money market interest rates and drive down the overall interest rate. After all, there is no significant decline in deposit interest rates, and if money market interest rates have not declined significantly, Bank In the case of no decrease in the cost of capital, it is impossible to voluntarily reduce the requirement of return on assets, and the outflow of funds has also led to a decrease in foreign exchange reserves and a slowdown in bank growth. The so-called rate cut is just a matter of hope. Next week, the market for open market has increased significantly. If the central bank does not voluntarily put more liquidity into operation, the capital side will still be tight, and the future needs to be standardized to ease the tension of capital market. Only when money market interest rates really drop, can economic momentum gradually stabilize and pick up.

Bond market: in the short term, tight funds will restrict the short end while the medium and long end is expected to decline slightly, but monetary policy easing is not yet over.

about bond market For example, the previous easing of policy expectations is very strong, and the interest rate of the middle and long end is downhill, but the tight capital side still restricts the short end interest rate decline, the curve is very flat or even upside down. The rate cut will not solve the problem of capital side, so the next week's long-term interest rate may decrease slightly, but the short end interest rate may not be obvious.

For a longer period of time, we believe that the central bank's monetary policy has not yet ended, and there is still a downward trend in bond yields. The yield of treasury bonds in 10 years is expected to be close to 3%. The 10 year plan is expected to approach 3.3%-3.4%, and the short end will be larger than the medium and long end. Maintaining our consistent view of the first half of the year, especially the first quarter of the bond market, we should still hold the coupons to go up, and we can continue to increase our positions if the positions are low. In addition, the risk appetite will also increase the risk asset price rise after loosening, and the global risk appetite is rising again.