Policy signals beyond the "double reduction"

Today's State Council Information Office financial press conference is "both early and timely," marking the beginning of a series of macro policies to stabilize the market and the economy following the April Politburo meeting.

"Early" undoubtedly draws on last year's successful experience of releasing positive news before the market opened on "September 24," with the Shanghai Composite Index closing up 0.8%. We believe this time the "package of financial policies" will have a more gradual impact on the market.

"Timely" is due to the imminent China-U.S. economic and trade negotiations. Whoever can take the initiative in the new round of negotiations will be competing in terms of morale and patience, which first requires a stable market expectation.

Although the market's first reaction to this press conference was the unexpected "double reduction" from the central bank, we believe that as the impact of tariffs becomes evident, the key factors that can truly ensure the economy and market remain stable in the long run still lie in the coordination of monetary and fiscal policies. It is expected that as the "package of financial policies" is gradually implemented in the second quarter, the space for incremental fiscal policies in the third quarter will also open up.

The unexpected aspect of this press conference's "double reduction" mainly lies in the interest rate cut. The reserve requirement ratio cut was anticipated, but why is the space for interest rate cuts being opened at this time given the good performance of macro data and the stock market in the first quarter? On one hand, the April PMI has already highlighted the impact of external changes on exports, which is expected to reflect in a series of macro data, leading to increased downward pressure on the economy. The interest rate cut reflects a monetary policy approach of "preparing for the rainy day." On the other hand, the breaking of exchange rate constraints, against the backdrop of a weakening dollar and positive signals from U.S. tariff negotiations, has recently seen the RMB exchange rate continuously appreciate towards the 7.20 level, thereby alleviating the pressure for domestic monetary easing.

After the reduction in housing provident fund interest rates, the subsequent space for stimulating demand-side policies in real estate will further open up. Compared to last year's "September 24" press conference, this time the reduction of the housing provident fund loan interest rate by 0.25 percentage points and the expected interest rate cut leading to a 0.1 percentage point decrease in LPR is limited. However, the strengthening of real estate support policies reflects the rapid implementation of the April Politburo meeting's statements on "better meeting housing consumption needs" and "quickly clearing restrictive measures in the consumption sector." Against the backdrop of a "gentle" recovery momentum in real estate recently, this sends a positive signal for further stabilizing the real estate market.

While implementing the "double reduction," a new round of structural monetary policies will focus on enhancing the adaptability and precision of financial support for the real economy. Whether it is insufficient domestic demand or export shocks, these more reflect the structural challenges of the Chinese economy. In this context, it is necessary to adopt a "multi-pronged" approach with structural tools. Especially in this press conference, the central bank's new round of structural tool deployment shows a distinct "expanding quantity and lowering price" characteristic, on one hand creating multiple relending tools, Better play the role of precise drip irrigation. On the other hand, the general reduction of the interest rates of relending, PSL, and other tools by 0.25 percentage points, in coordination with the overall interest rate cut, further reduces the funding costs of financial institutions.

In addition, we believe that new policy financial tools and other incremental policies are "ongoing." At the Politburo meeting on April 25 and the press conference on the 28th, there were deployments regarding "the establishment of new policy financial tools." Although there was no further clarification at the press conference on May 7, as subsequent external shocks may further manifest, policy financial tools can serve as an important lever to stabilize domestic investment. Looking back at the experience of 2022, the policy development financial tools with a total of 740 billion yuan, which supplemented the capital of major infrastructure projects, had a significant boosting effect on the real economy.

After the implementation of the package financial policies, will the finance take over the "baton"? As President Pan mentioned at the press conference, "serving consumption is an important focus for the expansion of consumption upgrades." The establishment of the relending tool for service consumption and elderly care by the central bank is indeed an important step in supporting service consumption. Monetary finance is "pioneering" in the field of service consumption; if the policy effect is significant, it will also open up greater space for subsequent fiscal support for consumption, reflecting the policy idea of "exploring while practicing." Of course, considering that the current finance still has stock policies (such as special bonds and special treasury bonds) that have not been fully implemented, the incremental policies for fiscal support of service consumption may only be released around mid-year.

The relevant policies of the capital market are reflected in "stability" and "progress," corresponding to the two requirements of the April Politburo meeting for the capital market to "maintain stability" and "activate." As Chairman Wu Qing stated, "fully support the Central Huijin Investment Company to play the role of a 'stabilization fund'," especially with the central bank as a backing, the current stabilization of the market bottom has basically been established; and with the implementation of the "Action Plan for Promoting the High-Quality Development of Public Funds," public funds will further emphasize being investor-centric, and the "progress" in stimulating market vitality and strengthening market functions will also be further reflected.

Authors of this article: Tao Chuan, Zhang Yunjie, Zhong Yumei, Source: Chuan Yue Global Macro, Original title: "Policy Signals Beyond 'Double Cuts' (Minsheng Macro Tao Chuan Team)"

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