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CICC: CN LPR Cut Smaller than MLF's, which May Hedge Narrower NIM of CN Banks, and Back Real Econ
CICC released a report, highlighting that yesterday (21st), China's 1-year loan prime rate (LPR) was cut by 10 bps, while the 5-year LPR was not lowered, with a rate of reducti...
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CICC: CN LPR Cut Smaller than MLF's, which May Hedge Narrower NIM of CN Banks, and Back Real Econ
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CICC released a report, highlighting that yesterday (21st), China's 1-year loan prime rate (LPR) was cut by 10 bps, while the 5-year LPR was not lowered, with a rate of reduction smaller than the market expected, especially for the 5-year period. Also, back on 15th August, PBOC lowered the 1-year medium-term lending facility (MLF) benchmark interest rate for the second time in the year by 15 bps to 2.5%.

The broker noted 3 "first-time" phenomena arising from these changes. It was the first time since the 2019 LPR reform that both the 1-year and 5-year LPR cuts were lower than the MLF cut; the first time that the 5-year LPR did not also cut after the cut in the benchmark rate; and the first time since May 2022 that the five-year LPR cut was smaller than that of the one-year LPR.

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CICC believed that the first 2 phenomena mentioned above may be due to the fact that the new loan rates more affected by the LPR have already fallen to historical lows, and some of the rates on loans to public sector state-owned enterprises may be overly competitively low. This means what needs to be adjusted is the stock of municipal investment and mortgage rates, which are more likely to be realised through agreement repricing rather than a cut in the LPR.

CICC further suggested that the 3rd phenomenon mentioned above may help hedge the risk of narrowing bank interest margins to better support the real economy, and expected deposit rates to come down. The broker noted that easing the liquidity risk of implicit liabilities will help to repair the risk appetite of the bond market, and could also help to strengthen the counter-cyclical adjustment capacity of local governments, giving full play to the synergistic effect of money and finance.

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