(Original title: Central Bank: There is room for interest rate cuts and reserve requirement ratios, but mortgage interest rates will not fall)

By reporter Bian Wanli

At 9:30 on August 20, the National Interbank Funding Center announced the loan market quoted interest rate (LPR): the one-year LPR quoted price is 4.25%, and the five-year LPR quoted price is 4.85%. This is the first time the People's Bank of China has announced a new LPR quotation after it decided to reform and improve the loan market quotation rate (LPR) formation mechanism on August 17. The reporter noticed that since August 6, 2019, the one-year LPR quotation has remained at a level of 4.31%. In contrast, the new one-year LPR quotation has declined. In this regard, Liu Guoqiang, deputy governor of the People's Bank of China, said, "The one-year LPR is 10 BP lower than the original benchmark interest rate and 6 BP lower than the old LPR."

So, after the LPR reform, will China lower the reserve requirement ratio and interest rates? Will mortgage interest rates drop? Will it have any impact on the exchange rate? Is it good for banks? In response to the above issues, the State Council Information Office held a regular policy briefing that day. Liu Guoqiang, deputy governor of the People's Bank of China, said at a briefing on August 20 that the new LPR formation mechanism will not reduce mortgage interest rates; there is room for both RRR and interest rate cuts, but whether they will fall or not depends on economic growth and price conditions. In terms of exchange rate, Sun Guofeng, director of the Monetary Policy Department of the People's Bank of China, emphasized that this reform does not involve changes in market interest rates. The key word is the marketization of loan interest rates, so it will have no direct impact on the RMB exchange rate.

All kinds of loans must refer to the LPR

Liu Guoqiang said at the meeting: "Bank loans used to refer to the benchmark interest rate. In the future, they will refer to the loan market quotation rate, that is, LPR. This is full coverage. It does not mean that certain types of loans will continue to refer to the benchmark interest rate, and certain types of loans will refer to the benchmark interest rate. Instead of referring to the new LPR, all types of loans must refer to the LPR. In the process of promotion, we will include MPA assessment, which is macro-prudential assessment.”

Promoting banks to use LPR is one of the considerations for reforming and improving the LPR formation mechanism. Liu Guoqiang introduced that banks are required to speed up the improvement of information systems and contract texts related to loan interest rate pricing, mainly refer to LPR pricing in newly issued loans as soon as possible, and use LPR as a reference benchmark in floating interest rate loan contracts. Starting from the third quarter of 2019, the People's Bank of China will include the use of LPR and loan interest rate competition into its macro-prudential assessment (MPA). At the same time, the statistical method of loan interest rates has been improved. Starting from August 20, it will no longer count the fluctuation of loan interest rates with reference to the benchmark interest rate, but will instead count the addition and subtraction of points on the basis of LPR.

In this regard, Sun Guofeng, director of the Monetary Policy Department of the People's Bank of China, also said that after the loan market quotation rate mechanism is reformed and improved, the use of LPR must be promoted, and banks must use LPR as the pricing benchmark for all types of loans. This includes two aspects. On the one hand, fixed-rate loans must be priced with reference to the LPR; on the other hand, in floating-rate loan contracts, the LPR must be used as the benchmark for floating-rate loan contracts, and all types of loans will be priced with reference to the LPR.

Mortgage interest rates will not fall

It is worth mentioning that the mortgage interest rates have changed from the reference base interest rate to the reference LPR, but the mortgage interest rates will not fall.

Liu Guoqiang said: "The mortgage interest rate has changed from the reference benchmark interest rate to the reference LPR, but the final loan interest rate level must remain basically stable. How to operate specifically? In a few days, the People's Bank of China will issue an announcement on the personal housing loan interest rate policy. Some details are still under investigation and will be clarified after the investigation. But one thing is for sure, the interest rate on mortgage loans will not change.decline. "

"This reform to improve the LPR formation mechanism focuses on deepening the market-oriented reform of interest rates and using reform methods to promote the reduction of financing costs for the real economy. In other words, the focus of interest rate liberalization is to reduce the financing costs of the real economy. "Liu Guoqiang said that for the real estate market, we must resolutely implement the requirements of the Political Bureau meeting of the Central Committee on July 30, adhere to the positioning of "houses are for living, not for speculation", and implement a long-term real estate management mechanism.

Liu Guoqiang pointed out: "There are two points: first, positioning, the goal positioning of 'housing is for living, not for speculation' cannot deviate; second, avoid instrumentalizing real estate and not use real estate as a means to stimulate the economy. How to implement such positioning and requirements in financial work must ensure that the increase in mortgage loans does not expand and the interest rates of mortgage loans do not decrease. In this "interest rate unification" reform, the interest rate of mortgage loans has changed from the benchmark interest rate to the reference LPR. The reference benchmark has changed, but the interest rate level cannot fall. "

There is still some room for adjustment in the reserve ratio

When talking about the background of the unification of interest rates at this time, Liu Guoqiang mentioned external factors. He said that the downward pressure on the global economy has increased recently, and the global central bank has entered an interest rate cutting cycle. China is currently the only major economy. An economy that implements conventional monetary policies (unconventional monetary policies generally have two characteristics, one is that the central bank directly purchases bonds in the market, and the other is zero interest rates. China is far from both of these).

Liu Guoqiang also emphasized that the market-oriented reform of interest rates is like "building a water canal" for the purpose. It is to make the water flow more efficiently and accurately to the fields, but the size of the water still depends on the gate. Therefore, the market-oriented reform of interest rates is conducive to enhancing the effect of monetary policy, but it cannot replace monetary policy, nor can it replace other policies. In the next stage, the central bank will work with other ministries. The government has used policy synergies to take a variety of measures to effectively reduce the comprehensive financing costs of enterprises and alleviate the financing difficulties of small and micro enterprises and private enterprises. At the above-mentioned policy briefing, a reporter asked whether the improvement of the LPR reform would affect the adjustment of the reserve ratio. In this regard, Sun. Guofeng said that China's current average reserve ratio is about 11%, which is relatively low among developing countries. If excess reserves are added to calculate a total reserve ratio, China's total reserve ratio is also low compared with developed countries. From the perspective of the reserve ratio, there has been a certain amount of room in the past, and there will be some room for adjustment in the future, but in general this space is not as big as everyone thinks. From the perspective of the reserve ratio, the focus is to improve the statutory reserve ratio framework of "three tiers and two excellences"

As for whether to lower the reserve requirement ratio. Regarding the issue of interest rate cuts, Liu Guoqiang said that in the short term, the main focus is on reform (improving the formation mechanism of the loan market quotation rate (LPR)). After the reform, there is room for lowering RRR and interest rates, but whether they will be lowered will depend on economic growth and price conditions.

Bank credit non-performing ratios will depend on the situation. Hope to reduce

Judging from the first quotation of LPR under the new mechanism, the interest rate level has dropped. So, for banks, is the LPR reform good or bad? Sun Guofeng believes that “the key word of reform is marketization, and the meaning of marketization is to improve banks’ independent pricing capabilities. After the bank's independent loan pricing ability is improved, the comprehensive competitiveness is improved, which is conducive to the bank's long-term sustainable development and stable operation."

He further analyzed that the decline in loan interest rates in the short term may have a certain impact on the bank's interest margins and profits, but on the other hand, as far as deposit interest rates are concerned, the deposit benchmark interest rate is retained and will be retained for a long time in the future. The People's Bank of China will alsoGuide the self-regulatory mechanism for market interest rate pricing, strengthen the self-regulatory management of deposit interest rates, maintain the order of market competition, stabilize the cost of bank liabilities, and create favorable conditions for the sustainable development of banks.

Liu Guoqiang said: "In the long term, banks rely on the real economy. If the real economy's financing costs fall, the bank's service targets will increase. If the real economy's financing costs fall and its development improves, the bank's credit non-performing rate will decrease and the credit quality will improve. This is the financial and real economy we hope to see. A virtuous cycle and healthy development of the economy will be good in the long run.”

The quotation pull of small and medium-sized banks is limited

It is worth noting that the scope of LPR quotations has been expanded to 18 by adding two urban commercial banks, rural commercial banks, foreign banks and private banks to the original 10 national banks. So, will the participation of small and medium-sized banks in the quotation raise the overall level of LPR?

Sun Guofeng said that from a structural analysis, the extent to which the quotations of small and medium-sized banks can drive LPR upward is limited. Because LPR is quoted by the quoting bank based on the loan interest rate for the best customers, based on the open market operating interest rate, which mainly refers to the MLF interest rate plus points. The best customers are those with better credit and greater overall contribution. The loan interest rates offered by small and medium-sized banks to these high-quality customers are also relatively low. Thinking about it from another perspective, no matter which bank these top-quality customers take loans from, the interest rates are relatively low. Therefore, the LPR quotations of small and medium-sized banks will not be significantly higher than that of large banks. The addition of small and medium-sized banks among the quoting banks may increase the LPR to a certain extent, but the extent is limited.

From the perspective of overall interest rate transmission, Sun Guofeng said: "Before the LPR reform, various banks were also quoting, mainly with reference to the loan benchmark interest rate. Therefore, the degree of marketization was not high. The decline in the entire interest rate level in the early stage was relatively large. We look at the interest rate of bond repurchase and the ten-year government bond yield. It is now about 3%, down 1 percentage point from the beginning of last year. Corporate bonds The interest rate of bonds has dropped by about 1.2 percentage points. The overall interest rate is declining, but the past LPR formation mechanism did not reflect the changes in market interest rates well. Under the new LPR formation mechanism, due to the increased degree of marketization, the decline in past market interest rates will be reflected more, which will drive the downward trend of LPR. ”