Without the injection of base money, swap facilities may affect the prices of stocks and bonds through the asset rebalancing effect. Central banks can guide financial institutions to actively engage in swaps by setting the price of swaps, such as setting a lower swap rate, a longer swap term, etc. For example, if the swap rate is low enough, the swap term is long enough, and the dividend rate of stock assets is significantly higher than the swap rate, after weighing the price risk, financial institutions may engage in swap operations and invest in the stock market. The result of the swap facility is a reduction in the supply of risky assets in the market (used as collateral to the central bank and cannot be sold), and an increase in the supply of safe assets (such as government bonds or central bank bills). Assuming that the original ratio of safe assets to risky assets held by all financial institutions is at a desirable level, after the swap occurs, the weight of safe assets held by financial institutions rises, and the weight of risky assets falls. This result gives financial institutions the incentive to rebalance their assets, the value of risky assets will rise, and the value of safe assets will fall, and the change in value will bring the weight of safe and risky assets back to the desirable level of financial institutions.
Real estate market policy adjusts the down payment ratio, re-lending and other policies, and states that it will support land acquisition, and still adheres to the marketization principle on the whole. In addition to the adjustment of the interest rate of existing mortgages, this real estate policy also includes the following four adjustments: 1) The minimum down payment ratio for commercial personal housing loans at the national level is unified to 15% (the same for the first and second houses); 2) In the re-lending policy for affordable housing, the proportion of the People's Bank's contribution is increased from the original 60% to 100%; 3) Policy banks and commercial banks are allowed to lend to qualified enterprises to acquire real estate company land in a market-oriented manner; 4) The extension of existing financing for real estate companies and the extension of commercial property loans are extended to December 31, 2026. The above policies continue to alleviate the problem of liquidity constraints from both the demand and supply sides, especially if the acquisition of land is effectively implemented, it will supplement the cash flow of real estate companies, and its effect may also be related to the local disposable financial resources and the expectations of various entities for the real estate market.
Advertisement
Monetary policy adjustments, combined with financial regulation and capital market reform measures, have had a positive impact on stock market expectations. If fiscal expansion is strong and expenditure efficiency is improved, market confidence will be further enhanced. In addition to monetary policy, capital market reform measures and financial regulatory measures are also issued together, including increasing the Tier 1 capital of six large commercial banks, the China Securities Regulatory Commission stating that it will further promote mergers and acquisitions of listed companies, the Financial Regulatory Authority proposing to expand the reform pilot of long-term investment of insurance funds, etc. Our macro model shows that the Shanghai Composite Index may have already priced in the short-term growth downturn expectations and funding pressure, in addition, the term spread of the 30-year Treasury bond seems to show that the bond market has priced in a lot of low price expectations. The release of this series of policies has improved the expectations of the secondary market. According to our calculations, residents' net assets have been under pressure since 2021, and the repayment burden of non-government departments is on the rise. Data from the National Bureau of Statistics shows that the income expectation index in the consumer confidence index in June is at a historically low level; data from the People's Bank of China shows that the income confidence index in the household survey data in the second quarter of 2024 is also at a historically low level. If fiscal policy is increased in the follow-up, and the direction of investment is also improved in efficiency, market confidence will be further enhanced, and economic growth will be effectively stimulated.
Strategy
On the morning of September 24, the State Council Information Office held a press conference (hereinafter referred to as the "National News Conference"), where the Governor of the People's Bank of China, Pan Gongsheng, the Director of the Financial Regulatory Authority, Li Yunze, and the Chairman of the China Securities Regulatory Commission, Wu Qing, attended the meeting and introduced the situation related to financial support for high-quality economic development. This meeting has attracted high attention from the market, and the A-share and Hong Kong stock indices have risen sharply. In our second half of the year A-share market outlook "Striking the Oars in the Middle of the Stream", we believe that the rhythm of the second half of the A-share market may be表现为 "stable front and rising back", and the report "The Market in September is Expected to Marginally Stabilize" was released at the end of August. The performance of A-shares in the second half of the year first suppressed and then rose, starting to stabilize and rise from the middle and late September. In combination with the spirit of this National News Conference, we currently believe that the rebound will continue, and a brief comment is as follows:
The National News Conference releases a positive signal. This National News Conference releases a positive policy signal, and the content that investors pay attention to mainly includes: 1) The reserve requirement ratio will be reduced by 0.5% in the near future, releasing about 1 trillion yuan of long-term liquidity. This year, depending on the situation of market liquidity, the reserve requirement ratio may be further reduced by 0.25-0.5 percentage points. 2) The 7-day reverse repurchase rate is reduced by 0.2 percentage points, adjusted from the current 1.7% to 1.5%. 3) The interest rate of existing mortgages is reduced and the down payment ratio of mortgages is unified, guiding commercial banks to reduce the interest rate of existing mortgages to the level of newly issued loans, and the average reduction is expected to be about 0.5%. 4) Support qualified securities, fund, and insurance companies to obtain liquidity from the central bank through asset pledge, this policy will greatly enhance the institutions' ability to obtain funds and increase their stock holdings. 5) Create a special re-lending for share buybacks and increases, guiding banks to provide loans to support listed companies and shareholders to repurchase and increase shares. In terms of the capital market, a series of policies that help improve investor expectations have also been proposed, including: 1) The policy opinions on medium and long-term funds entering the market will be issued. 2) Promote mergers and acquisitions measures, strongly support listed companies to carry out cross-industry mergers and acquisitions aimed at transformation and upgrading and the acquisition of unprofitable assets; for qualified listed company reorganizations, greatly simplify the review process; for reorganization valuation, performance commitments and other matters, according to the actual situation, increase regulatory tolerance; greatly simplify the review process, and encourage listed companies to strengthen industrial integration. 3) Protect the legitimate rights and interests of small and medium investors, and resolutely crack down on illegal and illegal acts such as financial fraud and market manipulation. 4) Listed companies should use dividends, buybacks and other ways to reward investors. 5) Long-term companies with a net value below their market value should formulate plans to improve their value. 6) The guidance for market value management of listed companies will be issued, and opinions will be sought soon. 7) Support the Central Huijin Company to increase its holdings in the capital market, etc.
In September, the A-share market turned to a marginal rise, and the rebound is expected to continue. In the "Market in September is Expected to Marginally Stabilize" released at the end of August, we believe that the reasons for the market change come from three aspects: 1) In September, the expectation of interest rate cuts in the United States increased, and global funds are expected to be reallocated, which may be beneficial to Chinese assets. 2) In combination with the current economic and market environment, policies to stabilize growth and expectations are expected to be further increased. 3) The mid-report performance period ends, and September enters the performance vacuum period, and some areas of fundamental pressure are temporarily relieved. On September 18, the Federal Reserve announced a reduction in the federal funds rate to start the interest rate cut cycle, and the Hong Kong stock market responded more, and A-shares also rebounded; on September 24, the National News Conference clearly released a positive signal to stabilize the economy, the market, and expectations, bringing a significant improvement in investor risk preferences. The current valuation of the A-share market is already at a relatively extreme position, and the forward valuation of the CSI 300 Index is near the historical bottom one standard deviation, with obvious investment appeal both horizontally and vertically; in terms of trading and behavior, there are also common bottom characteristics in history, and the turnover rate of A-shares calculated by free float market value was around 1.5% at the historical bottom level (the turnover rate at the historical bottom period was around 1%-2%). In this context, the appearance of positive policy signals is expected to boost investor sentiment. After the stock market soared on September 24, there may be twists and turns in the short term, but the rebound is expected to continue, and the trend of market stabilization still needs to pay attention to the subsequent changes in the expectations of listed companies' fundamentals.
In terms of allocation, non-bank and real estate chains may perform well in the short term, and medium-term attention should be paid to small and medium-sized market value and growth style, and high dividends may still show differentiation. Securities and insurance companies that directly benefit from the spirit of the National News Conference may be relatively strong in the short term, and led the rise on September 24; during the period of expectation changes, the real estate chain and pan-consumer also have stage opportunities, but the sustainability needs to pay attention to whether the subsequent fundamental expectations can continue to improve; if investor risk preferences rise combined with a relatively abundant liquidity environment, small and medium-sized enterprises and growth styles that have been adjusted since the beginning of the year may perform well in the medium term; banks providing loans to support listed companies and shareholders to repurchase and increase shares may be beneficial to high dividend companies, but combined with the defensive attributes of high dividends themselves, they may show differentiated trends in the process of improving risk preferences. On September 24, the coal sector, which is in the same cycle, led the increase, but the home appliance and textile and apparel sectors performed slightly weaker.
Benefiting from the policy signals of the National News Conference, A-shares rose significantly today (September 24). The Shanghai Composite Index rose by 4.2%, and the CSI 300 rose by 4.3%, with the total transaction volume of A-shares exceeding 97 billion yuan in a single day. In terms of style, the growth-style ChiNext Index rose by 5.5%, outperforming the market, and the STAR 50 rose by 3.7%; the small-cap style CSI 1000 rose by about 3.9%; the CSI Dividend Index rose by about 4.5%. In terms of industry, all industries rose across the board, with food and beverages, non-bank finance, steel, and coal leading the increase, among which the申万 industry index of food and beverages and non-bank finance rose by more than 6%; home appliances, automobiles, and real estate rose slightly weaker, but the increase was still between 1.2%-2.3%.
Fixed IncomeSince the second quarter, the domestic economy's sequential recovery has slowed down, with increased uncertainties both internally and externally, and the pressure to stabilize growth has intensified. Against this backdrop, the Politburo meeting on July 30 proposed "macro policies should continue to exert force and be more supportive," "strengthen counter-cyclical adjustments," etc.[3], and the central bank's comprehensive relaxation this time is also a response to policy calls. At the same time, the policy relaxation node is after the Federal Reserve has clearly turned to interest rate cuts and before the fourth quarter, on the one hand, it confirms that the external tightening environment has turned to alleviate the pressure on exchange rates, and on the other hand, it can provide a good monetary easing start for the economic recovery in the fourth quarter. On the specific policy level, the series of new easing policies announced by the central bank not only cover total control tools such as policy interest rates, reserve requirement ratios, existing mortgage interest rates, deposit interest rates, and mortgage down payment ratios, but also include the optimization of some existing structural tools and the creation of structural tools to support the stable development of the stock market. It has achieved both total easing support and the dredging and support for the weak links and pain points in the current economic recovery. On the impact of this comprehensive monetary policy relaxation on the bond market, we believe:
Firstly, it can be affirmed that liquidity in the interbank market in the fourth quarter is expected to remain loose. On the one hand, the release of long-term funds from the reserve requirement ratio (RRR) cut can effectively alleviate the liability pressure faced by large banks at present. Even if fiscal policy further strengthens later, the central bank also mentioned that it would consider conducting another RRR cut operation depending on the situation, which shows a clear attitude towards caring for the fund side. On the other hand, not only is the potential support from the central bank's injections likely to increase, but funds may also speed up the return to bank deposits driven by potential corporate settlements and the price comparison effect between deposits and money market funds, which will supplement bank liabilities and excess reserves. On the settlement front, with the Federal Reserve clearly starting the interest rate cut process and the US dollar falling back, the pressure on the renminbi to depreciate has temporarily eased. The trade surplus that has not been settled under the previous US dollar trend may start to choose to settle back into renminbi, especially for enterprises. The fourth quarter itself is often a peak period for corporate settlements, and the increase in settlement demand can indirectly enrich renminbi deposits and provide support for renminbi liquidity. On the price comparison effect front, due to the faster decline in bond interest rates than the reduction in deposit interest rates, the relative yield attraction of money market funds and wealth management has weakened on the margin, and the tendency for deposits to return has increased. Including the recent China International Capital Corporation (CICC) bond market survey [4] shows that investors' preference for wealth management has fallen back, and their preference for deposits has slightly warmed up. We believe that the effect of deposit "moving house" may have come to an end, which is also conducive to the re-expansion of bank liabilities.
Secondly, under the loose liquidity, the currency market interest rate is expected to speed up the catch-up decline. Considering that the Federal Reserve will still add to the interest rate cuts in the fourth quarter, the central bank's interest rate cut process may not have ended yet. If the endogenous demand recovery is weak, the central bank may further lower the policy interest rate, and the room for the currency market interest rate to decline is not low. The renminbi inflow under the RRR cut, interest rate cut, and settlement, as well as the price comparison effect between deposits and money market fund yields, all point to a potential acceleration in the catch-up decline of the currency market interest rate. Moreover, considering that the market generally expects the Federal Reserve to further cut interest rates by 50-75 basis points in the fourth quarter, it means that there is still room for the central bank to follow the interest rate cuts. Especially if the endogenous demand recovery in the fourth quarter is still slow and the confidence of the entity is difficult to boost, the central bank may further increase the intensity of interest rate cuts to stimulate the activity of funds and provide a good monetary environment for the stable recovery of prices. Therefore, for the fourth quarter, we believe that the main line of the bond market may still revolve around the currency market and short-term interest rates. The currency market interest rate is expected to迎来 a significant catch-up decline, which will open up the downward space for medium and short-term interest rates. Short-term bonds still have a certain safety cushion compared to long-term bonds, and the bull steepening trend in the bond market may continue.
For long-term interest rates, the central bank is still concerned, but more based on macro-prudential risk prevention considerations. The central bank's potential operations and stricter behavioral supervision only affect the rhythm of long-term interest rate fluctuations, and the core still depends on the strength of fiscal efforts and the swing of risk preferences. At this press conference, the central bank once again mentioned the long-term interest rate operation that the market is concerned about. The governor's speech content is basically consistent with the previous Lujiazui conference, mainly focusing on macro-prudential risk prevention. It mentioned "interest rate risk is an important part of financial institutions' risk management," "the central bank's risk warning on long-term Treasury bond yields and strengthening communication with the market is to curb the systemic risk that may be hidden in the one-sided downward trend of long-term Treasury bond yields caused by herd effects," "maintaining a good trading order in the bond market is also the responsibility of the central bank," "will increase the investigation and handling of illegal and irregular behaviors in the interbank bond market," etc. At the same time, the central bank also made it clear that "the level of Treasury bond yields is the result of market formation, and the People's Bank of China respects the role of the market." It can be seen that the central bank is not averse to interest rate declines driven by complete marketization, but is more worried about the potential risks that some illegal trading behaviors and crowded transactions under herd effects may bring to bond market fluctuations. Therefore, we believe that even if the central bank's potential focus only affects the rhythm of long-term interest rate fluctuations, it will not change the direction of long-term interest rate operation. Whether long-term interest rates will have the risk of bottoming and rebounding depends on the transformation of fiscal efforts and risk preferences. We believe that only if fiscal efforts are further significantly increased and expenditure is tilted towards the livelihood side, reversing the current weak entity confidence and risk preferences, will we see the reversal of the "asset scarcity" pattern in the bond market. If fiscal efforts are lacking, the risk of a large outflow of funds from the bond market in the short term is still relatively controllable, and the pressure for long-term interest rate adjustments is also limited, and there is no basis for a significant rebound.
In summary, we believe that the determined loose fund side and the potential further decline or acceleration of the catch-up decline process of policy interest rates will lead to a significant decline in the currency market, including repurchase, lending, and certificates of deposit. The downward trend of short-term interest rates in the fourth quarter is still one of the main lines of the bond market, and the bull steepening of the yield curve may continue.
Bulk Commodities
Physical demand is bottoming out, and the key to further improvement depends on fiscal policy.
The downturn in bulk commodities in the second half of the year is in sharp contrast to the market in the first half of the year. Bulk commodities face significant selling pressure. Crude oil, which represents global demand, and iron ore and rebar, which price domestic demand, once fell below $70/barrel, $90/ton, and 3000 RMB/ton, respectively, both hitting new lows since 2024. On the one hand, overseas employment and economic data are weakening, and market concerns about a hard landing in the US economy have deepened. On the other hand, the transformation of China's fiscal policy into physical work volume is still slow, and the seasonal peak demand in the golden nine months currently looks lackluster. At the current point, the Federal Reserve's 50 basis point interest rate cut has been implemented, and the possibility of a soft landing for the US economy has increased, easing market concerns about an economic recession. Industrial product prices such as copper have rebounded first. The domestic demand situation may become the next trading focus of the market.
At present, domestic commodity demand is bottoming out. From high-frequency data, there are signs of marginal improvement in the apparent demand for coal, black and non-ferrous metals, and the speed of inventory reduction is also accelerating. Power generation increased year-on-year, with thermal power generation increasing year-on-year and expanding to more than 10%. The daily consumption of thermal coal has maintained strong resilience, terminal inventory continues to reduce, and the coal price at Qinhuangdao Port has begun to rebound steadily. On the black side, the apparent demand for rebar has improved on a环比 basis, inventory continues to reduce at a low level, and steel mill profits have also improved. In the non-ferrous sector, the utilization rate of copper materials is also improving. Although copper inventory is relatively high, the reduction is still relatively smooth.
At the current point in time, with domestic physical demand bottoming out, the selling pressure on bulk commodities in the previous period may be somewhat relieved. The introduction of monetary policy will boost market sentiment to a certain extent, and market expectations for increased fiscal policy may also rise. We believe that varieties that are more focused on domestic pricing may have greater elasticity. Looking forward, the key to the sustainability of bulk commodity price rebounds still depends on the strength of fiscal efforts and the transformation into physical work volume. From the terminal demand perspective, construction of real estate and traditional infrastructure projects on the investment side is still relatively weak, but the issuance of special bonds has significantly accelerated since August, and we expect that the construction side may have some marginal improvement. In addition, investments with strong counter-cyclical characteristics such as new energy power sources and power grids continue to maintain high growth. In terms of consumer goods, the production of automobiles and home appliances has benefited from external demand this year and has performed well. With the implementation of the policy supporting the consumption of durable goods by exchanging old for new with the support of ultra-long-term special treasury bonds, it may further support the performance of durable goods consumption.Foreign Exchange
We primarily analyze the impact of the central bank's implementation of loose monetary policies on the exchange rate of the Chinese Yuan (RMB). Our conclusion is that the central bank's interest rate cuts and reserve requirement ratio (RRR) reductions exert relatively limited pressure on the RMB exchange rate. We even observe that on today's date (September 24th), both onshore and offshore RMB exchange rates have risen instead of falling. How can we explain today's exchange rate performance?
Firstly, although the central bank has reduced interest rates, the interest rate differential between China and the United States is still converging. The central bank's interest rate cuts influence the exchange rate through the channel of the China-US interest rate differential. Logically, central bank rate cuts would widen the China-US interest rate differential, thereby impacting the RMB exchange rate to a certain extent. However, the current changes in the China-US interest rate differential are mainly contributed by the US dollar side. After the Federal Reserve's unexpectedly large rate cut in September, China-US monetary policies have already converged. Even if the central bank cuts rates by 20 basis points (bp), this magnitude is still far less than the expected rate cut by the Federal Reserve. Therefore, the central bank's rate cuts cannot change the overall trend of the narrowing China-US interest rate differential in the medium term, and their impact on the exchange rate is relatively small.
Secondly, the rate cut on September 24th has improved economic expectations, which is conducive to attracting the return of cross-border securities investment funds. The factors influencing the exchange rate are diverse. On one hand, the central bank's rate cuts affect the China-US interest rate differential, and on the other hand, they also improve expectations for China's economy. Improved economic expectations can drive the return of cross-border securities investment funds, thereby supporting the RMB exchange rate. This will offset some of the negative impacts of the interest rate decline.
Thirdly, the supply and demand relationship in the exchange rate market supports the RMB exchange rate. With the Federal Reserve's easing and the two-way fluctuation of the RMB exchange rate, many foreign trade companies have recently begun to increase the proportion of settlement and hedging. This has shifted the supply and demand relationship in the foreign exchange market to a side favorable to the RMB exchange rate. As the seasonal point of foreign trade settlement approaches the end of the year, we may see more settlement funds entering the market, which will support the RMB exchange rate trend before the end of the year.
Lastly, the central bank's exchange rate policy can ensure the stable operation of the exchange rate. Governor Pan mentioned in the press conference that there are two goals for exchange rate policy: the first is to adhere to market-determined exchange rates, maintaining flexibility, and the second is to strengthen expectation guidance to prevent one-sided expectations from self-fulfilling and causing exchange rate over-adjustment. Currently, expectations for the RMB exchange rate have already turned to stability, and the central bank's exchange rate policy orientation has gradually shifted to neutrality. In the future, if one-sided expectations re-emerge, the central bank may take action to maintain the basic stability of the exchange rate.
Looking ahead, we believe that there is still a possibility for the RMB exchange rate to further appreciate in the short term. This is because further rate cuts by the Federal Reserve will lead to a narrowing of the China-US interest rate differential, and because the demand for corporate settlement has not yet been cleared, and there is still a relatively high demand for the sale of US dollars before the end of the year. Therefore, before the end of the year, we do not rule out the possibility of the RMB exchange rate further rising to below 7.0. In the medium to long term, the changes in the RMB exchange rate depend on various factors, including both the China-US interest rate differential and cross-border capital flows driven by changes in expectations for the economies and financial markets of the two countries. Therefore, in the medium to long term, the RMB exchange rate may exhibit a two-way fluctuation pattern with both rises and falls according to changes in market supply and demand.
Banking
On September 24th, the State Council Information Office held a press conference to introduce the situation related to financial support for high-quality economic development. We provide the following interpretation of policies related to banks.
1. Interest rate cuts and reserve requirement ratio reductions support the economy. This specifically includes:1) Reserve Requirement Ratio (RRR) Cut: The meeting mentioned that the central bank will soon lower the reserve requirement ratio by 50 basis points (bp), providing about 1 trillion yuan in long-term liquidity to the financial market. After the RRR cut, the average reserve requirement ratio for the banking industry will be around 6.6%, with further cuts of 0.25-0.5 percentage points planned at appropriate times within the year. We believe the RRR cut aims to promote bank lending to support economic growth, and the funds released by the RRR cut can earn higher interest income. We estimate that a 50bp RRR cut will contribute about 1bp to the banks' net interest margin.
2) Interest Rate Cut: The meeting mentioned that the central bank will soon lower the 7-day reverse repo rate by 20bp, leading to a 30bp reduction in the Medium-Term Lending Facility (MLF) rate, and a 20-25bp reduction in the LPR and deposit rates. We believe the interest rate cut aims to lower the relatively high real interest rates in an environment of declining asset prices and inflation growth. Recent overseas interest rate cuts and the settlement of export proceeds have also eased exchange rate pressures.
3) Reduction of Existing Mortgage Rates: The meeting mentioned that the central bank plans to guide banks to make batch adjustments to existing mortgage rates, bringing them closer to the rates of newly issued loans. The central bank estimates an average reduction of about 50bp, affecting 50 million households and 150 million people, reducing household interest expenses by about 150 billion yuan per year on average. The reduction of existing mortgage rates is beneficial for promoting consumption, reducing the behavior of early repayment, and compressing the space for illegal replacement of existing mortgages.
Impact on Banks: Assuming a 20bp reduction in the 1-year and 5-year LPR, and an average reduction of 50bp in existing mortgage rates, we estimate the impact on the net interest margin to be 9bp and 6bp, respectively, totaling about 15bp. Assuming a 25bp reduction in deposit rates and a 50bp RRR cut can basically offset the impact on the banks' net interest margin. According to the central bank's calculations, the overall impact of this interest rate adjustment on the banks' net interest margin is neutral. We believe this mainly takes into account the need to maintain a reasonable net interest margin and profit for banks to ensure the stability of the financial system.
2. Financial Support for the Real Estate Market. In addition to the reduction of existing mortgage rates, real estate financial policies also include:
1) Reduction of the Down Payment Ratio for Second Homes. The central bank unifies the minimum down payment ratio for first and second homes, reducing the national minimum down payment ratio for second home loans from the current 25% to 15%, with localities allowed to implement policies based on city-specific conditions. We believe this adjustment is beneficial for increasing the loan proportion for homebuyers with improved demand, but whether residents increase their leverage ratio is also limited by income (for example, the monthly mortgage debt-to-income ratio is generally not higher than 50%) and willingness.
2) Extension of Existing Financing and Operational Property Loan Policies for Real Estate Companies. The central bank and the Financial Regulatory Authority will extend the operational property loans and the "Financial 16 Articles" policies, which are due to expire by the end of the year, to the end of 2026. The Financial 16 Articles include policies for extending the existing financing of real estate companies for one more year and not adjusting the loan classification. We believe this is beneficial for stabilizing the cash flow of real estate company financing, reducing liquidity pressure, and alleviating the pressure on bank asset quality from the exposure of real estate loan risks.
3) Increase in the Proportion of Central Bank Funding for Affordable Housing Re-lending. The central bank will increase the support ratio of central bank funds for the 300 billion yuan affordable housing re-lending established by the People's Bank of China in May from the original 60% to 100%. The affordable housing re-lending rate is 1.75%, and based on the average liability cost of banks at 2.2%, a 100% support ratio can save about 40-50bp in liability costs for this loan, which can increase the incentive for banks to issue loans. As of the first half of the year, nearly 25 billion yuan in rental housing loans have been issued, and the central bank has reviewed and issued more than 12 billion yuan in re-lending funds. The progress is not fast, and we believe it is also affected by the willingness of local governments and project returns.
4) Support for the Acquisition of Existing Land. The central bank will study allowing bank loans to support the market-oriented acquisition of real estate company land by enterprises on the basis of using some local government special bonds for land reserve, and provide re-lending support from the People's Bank of China if necessary. We believe this loan is also helpful in alleviating the financial pressure on real estate companies, and if the acquiring entity is a state-owned enterprise with a higher credit rating, the quality of the related loan assets is also more controllable.
3. Financial Support for the Stock Market. Mainly includes:1) Non-bank institutions "swap securities for securities" to increase stock holdings. The central bank will create a securities, funds, and insurance companies swap facility to support securities, funds, and insurance companies in using their held bonds, stock ETFs, Shanghai-Shenzhen 300 constituent stocks, and other assets as collateral to exchange for high-liquidity assets such as national treasury bonds and central bank bills from the central bank. The funds obtained from selling or pledging these assets will be used to invest in the stock market, with an initial operation scale of 500 billion yuan. This operation can enhance the ability of relevant institutions to leverage up to increase stock holdings, with the specific scale depending on the willingness and leverage limits of non-bank institutions to increase stock holdings. The methods of cashing out the swapped national treasury bonds and central bank bills (selling or repo) also need to be clarified.
2) Loan support for listed companies to repurchase stocks. The central bank will create a special re-lending facility for stock buybacks and increases, guiding banks to provide loans to listed companies and major shareholders to support stock buybacks and increases. The central bank will issue re-lending to banks, with a 100% funding support ratio, a re-lending interest rate of 1.75%, and a loan interest rate of about 2.25% for commercial banks to customers. The initial amount is 300 billion yuan. We believe that the lower loan interest rate can better motivate listed companies to borrow funds for stock buybacks and increases. Under this operation, banks can earn a 50bp interest spread on loans. The borrowing credit subjects are relatively high-quality listed companies. To reduce the credit risk of loans, it is worth paying attention to the credit enhancement methods of this loan in the future, such as whether a certain pledge ratio is set for stock mortgage or whether other methods such as major shareholder guarantees are adopted.
4. Capital injection into large banks. The Financial Regulatory Authority mentioned that the state plans to increase the core tier-one capital of six large commercial banks, implementing it in an orderly manner according to the idea of "overall promotion, phased and batched, one bank one policy". In recent years, the loan growth rate of state-owned large banks has been higher than that of small and medium banks, but the interest rate spread has also decreased more. At the same time, there is also the pressure of digesting non-performing assets through profits and provisions. Under this background, the core tier-one capital adequacy ratio of some large banks also faces downward pressure. Since core tier-one capital can only be supplemented through internal profits or external equity financing, we believe that a new round of capital injection is expected to alleviate capital pressure. Subsequently, it is necessary to observe the methods and structures of financing, such as whether it is financed through fiscal or market-oriented methods, whether it adopts directed issuance, rights issue, or other methods, the relationship between the financing price and net assets per share, the order and rhythm of financing for each bank, etc.
5. Support for banks' AIC investment in equity. The Financial Regulatory Authority mentioned that it will study: 1) Expand the pilot scope of equity investment by financial asset investment companies (AICs) under large commercial banks from the original Shanghai to Beijing and other 18 large and medium-sized cities with active technological innovation. 2) Appropriately relax the restrictions on the amount and proportion of equity investment, increase the proportion of on-balance-sheet investment from the original 4% to 10%, and increase the proportion of investment in a single private equity fund from the original 20% to 30%. 3) Implement the requirements of due diligence exemption, and establish a long-term and differentiated performance assessment. We believe that the above measures are expected to encourage banks' AICs to invest in equity and enhance banks' support for technological innovation.
6. Optimize the policy of no-principal续贷 for small and micro enterprises. In 2014, the original Banking Regulatory Commission's policy for small and micro enterprises' "no-principal续贷", the Financial Regulatory Authority will optimize it later: 1) Expand the续贷 targets from the original some small and micro enterprises to all small and micro enterprises. Small and micro enterprises that have real financing needs after the loan expires and also have financial difficulties can apply for续贷 support if they meet the conditions; 2) Temporarily expand the续贷 policy to medium-sized enterprises, with a term of three years, that is, medium-sized enterprise working capital loans that expire before September 30, 2027, can all refer to the续贷 policy for small and micro enterprises; 3) Adjust the risk classification standards, and handle the renewal of loans for enterprises that operate legally, comply with regulations, and have good credit, without downgrading the risk classification solely due to续贷. We believe that this policy is expected to reduce the repayment pressure on small and medium-sized enterprises, reduce the risk of capital chain rupture, and also help stabilize the asset quality of banks.
Bank investment advice. We believe that the combination of financial policies reflects a clear signal of stable growth and confidence, and fully considers the impact on bank interest spreads and asset quality while supporting the real economy and the capital market, helping to achieve symbiosis and prosperity with the real economy while operating stably; The capital injection into large banks helps to maintain stable growth of credit and improve the ability to resist risks. The dilution of per-share dividends after capital injection depends on whether bank profits can grow faster than share growth. If banks promote the improvement of the real economy and reduce bank credit costs on the basis of stronger capital capabilities, the dilution effect on per-share dividends is also limited. Overall, in "The Logic of Bank Rise", we proposed that banks need to pay attention to three medium-term risk points (real economy liquidity and asset quality, real estate stock debt, and resident early repayment) within 6-12 months, and this round of policies has targeted responses. The key for the bank's basic situation is to observe the substantive effect of a series of policies on improving long-term economic expectations.
Risk warning: The actual policy plan is not as expected, the risk of small and medium banks, the risk of real estate and urban investment debt.
Non-bank
The policy combination punch brings important catalysis, and we are optimistic about non-bank investment opportunities.
The central bank has released a series of policy benefits. We believe that many policies aimed at providing market liquidity and supporting the development of the stock market will bring a strong upward catalyst to the non-bank sector as a whole. Reiterate the views on insurance and securities companies as follows:Insurance: High-quality life insurance is expected to ride the momentum and improve, with significant expectations gap remaining in the long term. In terms of life insurance, we believe that the overall life insurance sector will benefit from the expected improvement in the return on equity assets and will see further recovery. We reiterate the important investment logic of Chinese-funded life insurance: 1) The market has overestimated the current interest rate risk of high-quality companies, and the core profits of high-quality life insurance are expected to rise steadily in an environment of declining interest rates; 2) The improvement in the liability side of life insurance is gradually moving towards a more comprehensive quality improvement; 3) The current regulatory policies aimed at preventing risks are expected to protect the industry's reasonable profit levels, which has an undeniable profound impact on the industry. The performance trend of Chinese-funded life insurance so far this year has exceeded market expectations but is basically in line with our judgment in the annual outlook reports of the past two years. We reiterate that the future profit trend of Chinese-funded life insurance is likely to be differentiated, with some companies' profits fluctuating and declining in a challenging interest rate environment, while high-quality companies will rise steadily; the more challenging the times, the more the financial reports of high-quality companies will continue to prove their resilience. For details, see the reports "Insurance Industry Outlook 2023: Towards a New Cycle" (December 2022) and "Insurance Outlook 2024: The瑕 Does Not Conceal the Jade" (December 2023).
For property insurance, we believe that the profit expectations of Chinese property insurance will also benefit from the improvement in stock returns. At the same time, the company's business model has strong resistance to a low-interest-rate environment, and its long-term fundamentals are outstanding. However, the valuation has already reflected this to a large extent, and the company's future profit space may lie in the systematic improvement of the property insurance valuation system when market sentiment continues to be low. For details, see the relevant discussion in "Japanese Insurance Series (2): The Evolution and Enlightenment of Japanese Property Insurance."
In terms of overseas insurance, we believe that interest rate cuts at home and abroad have promoted the improvement of liquidity in the Hong Kong stock market.
In addition, regarding the policy of convenience for swaps between securities funds and insurance companies, we expect that the participation of insurance institutions in the short term will mainly depend on the insurance funds' judgment of the market direction. However, this policy will still provide additional liquidity for insurance funds when there are investment opportunities in the market.
Securities and diversified finance: It is recommended to seize the current investment opportunities of securities firms and the Hong Kong Stock Exchange. We believe that the current performance/valuation/positioning of the securities firm sector is at the bottom. The recent reduction in reserve requirements and interest rates provides market liquidity, new policy tools support the development of the stock market (such as the convenience of swaps between securities funds and insurance companies/stock repurchase and increase in loans), and the pace of industry mergers and acquisitions is accelerating. Pay attention to the rebound opportunities under the catalysis of merger and acquisition transactions, market improvement, and internal and external policy catalysis. Focus on two main lines of individual stocks: one is comprehensive and characteristic securities that benefit from supply-side reform through internal and external development, and the other is leading internet securities that have both elasticity and growth both domestically and internationally.
1) The net profit of listed securities firms in 1H24 decreased by 22% year-on-year, and the net profit in 2Q decreased by 12% year-on-year, which is narrower than 1Q. Some securities firms benefited from the stable performance of asset management/investment and other businesses; we expect that the full-year performance will further narrow the decline on the low base of the same period last year, and the performance inflection point of the current sector has appeared.
2) A-share securities firms are currently trading at 1.1x P/B, which is at the 2.5%/1.6% percentile of the past 5/10 years, and H-share securities firms are trading at 0.4x P/B, which is at the 4.2%/2.1% percentile of the past 5/10 years. Both valuation and institutional holdings are at the bottom.
3) This year, the pace of industry mergers and acquisitions has accelerated. We are optimistic about the transaction opportunities of the securities merger theme under the top-down regulatory reform and the internal development needs of securities firms.
In addition, the reduction in interest rates provides a basic support for the improvement of liquidity in the Hong Kong stock market and is expected to promote the profit and valuation repair of the Hong Kong Stock Exchange. The current Hong Kong Stock Exchange is trading at 26x/24x 24e/25e P/E, and the valuation is still relatively low compared to the past center. It is recommended to pay attention to the continuous catalysis of the Hong Kong Stock Exchange's valuation repair by potential economic policies and the improvement of overseas liquidity.
Risk warning: The growth of new policy premiums is lower than expected; there is a significant fluctuation in the capital market; the policy is not implemented as expected; the competition in the industry intensifies.Real Estate
On the morning of September 24th, the State Council Information Office held a press conference on the financial support for high-quality economic development. In terms of real estate-related policies, the following were proposed: 1) The existing housing loan interest rates are to be reduced to a level close to the newly issued housing loan interest rates, with an expected reduction of about 0.5 percentage points, and the interest rate cut may also lead to a decline of about 0.2 percentage points in the LPR and newly issued housing loan interest rates; 2) The minimum down payment ratio for the first and second homes is unified, with the national level second-home down payment ratio adjusted from 25% to 15%; 3) A 300 billion yuan loan for affordable housing, with the central bank's funding support ratio increased from 60% to 100%; 4) The extension of the operational property loan and the "Financial 16 Articles" policy documents, originally due to expire at the end of 2024, to the end of 2026; 5) Research on allowing policy banks and commercial banks to support qualified enterprises in the market acquisition of real estate companies' land, to activate existing land use, alleviate the financial pressure on real estate companies, and the People's Bank of China may provide policy support if necessary.
These policies, both in scope and intensity, have exceeded market expectations. In our report "Policy Expectations Boost, Real Estate Sector Still Has Layout Opportunities" published on August 31st, we pointed out that against the backdrop of the industry's fundamental weakness, the possibility of dynamic optimization and pressure hedging in the real estate policy sector is increasing. It is necessary to pay attention to whether various policies, including the adjustment of existing housing loan interest rates, may be strengthened simultaneously to form a joint effort. The five real estate-related policies proposed at this meeting have targeted measures for the industry's more prominent demand weakness, credit risk, and storage bottleneck issues: 1) From the demand side, after this reduction in the national second-home down payment ratio, we expect that localities will gradually follow up adjustments under the "city-specific policy" framework, and it is not ruled out that Beijing and Shanghai will also make appropriate adjustments to purchase restrictions and loan policies, which may temporarily alleviate residents' housing purchase wait-and-see sentiment; in addition, although the adjustment of existing housing loan interest rates is difficult to directly stimulate housing demand, its indirect improvement of the economy through the consumption path, and the decline in newly issued housing loan interest rates guided by interest rate cuts, may also have some support for housing demand. 2) From the credit side, the operational property loan and the "Financial 16 Articles" policy, which were previously effective in alleviating corporate cash flow pressure, have been further extended for two years this time. At the same time, research is being conducted to promote policy banks to support qualified enterprises in acquiring real estate companies' land. It is recommended to continue to observe the arrangements and progress of this policy in terms of financing costs, loan mechanisms, and implementation scale. We expect that the above policies, together with the "white list" mechanism for projects, will effectively assist in the successful completion of "delivery of buildings" work and prevent further spread of credit risks. 3) In response to the previously slow progress in affordable housing storage work, this time some improvements have been made, that is, increasing the central bank's funding support ratio to 100%, implying that the loan financing cost will be reduced from about 2.5% to 1.75%. Under the principles of marketization and legalization, the corresponding purchase price limit will be increased from the previous 50-60% of the market price to 70-80% of the market price, which is expected to accelerate the storage work and requires continuous observation of subsequent progress (as of the end of June, the loan issuance was about 12 billion yuan).
The sector will enter a period of policy effect observation. Considering that the current real estate industry's fundamentals are still in a trend of shrinking volume and falling prices, the financial support policies introduced this time may bring about a phased marginal improvement, but whether they can bring about a fundamental turning point still needs to observe the policy effects, as well as whether there is further effort to stimulate economic growth on the fiscal side.
Risk warning: The implementation strength and effectiveness of policies are not as expected; the industry's fundamentals and real estate company credit issues accelerate deterioration.
Building Materials
On September 24th, the State Council Information Office held a press conference on the financial support for high-quality economic development, announcing the reduction of reserve requirements and the existing housing loan interest rates, and unifying the minimum down payment ratio for housing loans, which slightly exceeded our and the market's expectations.
From the emotional side, we believe that building materials, as a policy-driven cyclical variety, are expected to benefit from the release of liquidity, especially when the institutional holdings of building materials are at a historical low, and the market is highly pessimistic. After being oversold, they are expected to welcome a phased valuation repair under the catalysis of reserve reduction. Our holding suggestion is still to focus on well-balanced, safe margin-rich configuration varieties. Under the leadership of the leaders, cement and glass fiber leaders have moved towards a direction that values profits more than shares, which gives leaders with cost advantages and safe margins a certain configuration value at certain positions. Stocks with attractive dividends at low positions + subsequent price increase expectations can be used as absolute return varieties for phased configuration; consumer building materials and new materials are optimistic about varieties with pricing power and strong cash flow under the "small market big company" pattern.
From the fundamental side, the market previously worried about the continuous downturn in real estate sales, and the downward cycle of completion may be further extended. We believe that new policies such as reducing existing housing loan interest rates and unifying down payment ratios can boost enterprise and channel confidence. For real estate varieties biased towards completion, such as glass, hardware, coatings, sand powder, and other fields, it is expected to promote the release of inventory demand and marginally alleviate price competition pressure.
Central construction companies previously experienced a certain adjustment in the sector due to a year-on-year decline in central enterprise orders in 2Q24 and an increase in receivables year-on-year. However, we believe that the acceleration of special bond issuance in 2H24, central enterprises have a higher priority in the collection sequence, and their comprehensive ability to obtain orders and collect payments far exceeds local construction enterprises and urban investment platforms. The fundamentals are still relatively stable, and the opportunities brought by sector adjustments are still relatively more than risks, and low-position configuration opportunities can be sought. The reduction of reserve requirements is expected to boost sector sentiment to a certain extent.Risk Warning: The decline in real estate completions and new starts exceeded expectations, and the physical work volume of infrastructure in the second half of 2024 fell short of expectations.