M1 Decline Continues, Reserve Ratio Cut Anticipated

Financial data for August 2024, aside from the significant pressure on M1 growth rate, showed relatively stable trends for other figures. The M1 growth rate continued to fall beyond expectations to -7.3%, down from the previous -6.6%. Low consumer spending, subdued home-buying sentiment, restricted cash flows for platform companies, and regulatory policies such as the prohibition of manual interest supplementation all had an impact. In addition, the excessive consumption of demand deposits due to corporate tax payments may be the main drag on M1. If fiscal efforts in the future fall short of expectations, there may still be a lack of upward momentum. Looking ahead to future monetary policy, policies aimed at reducing the financing costs for the real economy are expected to continue, with potential reserve requirement ratio (RRR) cuts. If an RRR cut occurs, it could lead to a 25 basis point (BP) reduction in both the one-year and five-year LPR rates. Furthermore, with the Federal Reserve's interest rate cut confirmed, there is a possibility that China will continue to lower its policy interest rates.

In August, new credit increased by 900 billion yuan, a year-on-year decrease of approximately 460 billion yuan. The stock growth rate was 8.5%, down from the previous 8.7%. In terms of credit structure, only bill financing increased year-on-year, while all other items decreased. Specifically, household loans increased by 190 billion yuan, a year-on-year decrease of about 202.2 billion yuan. Short-term and medium to long-term loans increased by 71.6 and 120 billion yuan, respectively, with year-on-year decreases of about 160.4 and 40.2 billion yuan.

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Corporate (and institutional) loans increased by 840 billion yuan, a year-on-year decrease of about 108.8 billion yuan. Short-term loans decreased by 190 billion yuan, a year-on-year increase in reduction of about 149.9 billion yuan. Medium to long-term loans increased by 490 billion yuan, a year-on-year decrease of about 154.4 billion yuan. Bill financing increased by 545.1 billion yuan, a year-on-year increase of about 197.9 billion yuan. On one hand, with corporate bond rates at a low level, direct financing (corporate bonds in social financing) has挤出d some of the loans on the books. On the other hand, it is still crucial to repair corporate profits and entrepreneurs' confidence. In the absence of sufficient credit vehicles, banks again "rushed bills" in August to stabilize the overall credit allocation.

Non-bank loans decreased by 135.5 billion yuan, a year-on-year increase in reduction of 99.7 billion yuan. Seasonally, non-bank loans in August are generally negative, and this time the negative amount is slightly larger. We believe the main reason is that the funding situation tightened in the middle of August this year, with some overnight fund prices exceeding seven-day rates, possibly due to the MLF maturing on the 15th but being renewed only in the latter half of the month.

In August, social financing increased by 3.03 trillion yuan, a year-on-year decrease of about 98.1 billion yuan, with a growth rate at the end of the month of 8.1%, down from the previous 8.2%. In the incremental structure, government bonds and trust loans were the main positive contributors year-on-year, increasing by 1.61 trillion yuan and 48.4 billion yuan, respectively, with year-on-year increases of about 437.1 billion yuan and 70.5 billion yuan. The issuance of government bonds accelerated, but the formation of subsequent practical work volume still depends on the effective disbursement and use of funds, which has some uncertainty within the year.

All other structural items showed a year-on-year negative growth. Among them, social financing口径 RMB loans increased by 1.04 trillion yuan, a year-on-year decrease of about 297.1 billion yuan; foreign currency loans decreased by 61.2 billion yuan, a year-on-year decrease of about 41.1 billion yuan; entrusted loans increased by 2.6 billion yuan, a year-on-year decrease of about 7.1 billion yuan; undiscounted bank acceptance bills increased by 65.1 billion yuan. Although this was a year-on-year decrease of about 47.8 billion yuan, the off-balance-sheet bills recorded an unexpected positive growth, which to some extent deviated from the real economy, possibly due to the bill discount rate being too low, leading to some bill arbitrage activities; corporate bonds increased by 169.2 billion yuan, a year-on-year decrease of about 109.6 billion yuan; equity financing increased by 13.1 billion yuan, a year-on-year decrease of about 90.5 billion yuan.

At the end of August, the M2 growth rate was 6.3%, unchanged from the previous month, while the M1 growth rate was -7.3%, down from the previous -6.6%. Both figures had lower bases last year, but the M2 growth rate stabilized, while the M1 growth rate continued to fall beyond expectations. Low consumer spending, subdued home-buying sentiment, restricted cash flows for platform companies, and regulatory policies such as the prohibition of manual interest supplementation all had an impact. In addition, the excessive consumption of demand deposits due to corporate tax payments may be the main drag on M1.If the central bank lowers the reserve requirement ratio, from the mechanism of "market interest rates + central bank guidance → LPR → loan interest rates," it may lead to a 25BP decrease in both the 1-year and 5-year plus LPR. The reason for the larger magnitude is that the current pricing may be overestimated. In recent years, the proportion of general loans in China that are "discounted" based on the LPR quote has been increasing. In June of this year, the proportion of loans with interest rates higher than the LPR was 49.55%, the proportion of loans with interest rates equal to the LPR was 6.16%, and the proportion of loans with interest rates lower than the LPR was 44.29%. The proportion of "discounted" pricing increased by nearly 4 percentage points from 40.44% in March, and this figure was only 15.55% in August 2019 when the LPR reform was implemented. If the LPR decreases further, it may continue to drive the adjustment of bank deposit interest rate pricing.

From the perspective of reducing the actual interest rate, a moderate increase in CPI is also crucial and requires the combined efforts of fiscal, monetary, industrial, and other multi-dimensional policies. At the press conference on September 5, the central bank also mentioned that "due to factors such as the speed of bank deposits flowing into wealth management products and the narrowing of bank net interest margins, there are certain constraints on further downward movement of deposit and loan interest rates." We believe this is indeed a practical constraint faced by the continued reduction of deposit and loan interest rates: if the LPR is further guided down and transmitted to loan interest rates, the pressure on bank net interest margins will continue to rise. If the pressure on bank interest margins is further alleviated by reducing deposit interest rates, it may easily exacerbate the outflow of deposits. Overall, stabilizing prices still requires the combined efforts of policies in various dimensions.

In addition, the Federal Reserve cut interest rates in September, and thereafter, China may continue to have the possibility of lowering policy interest rates.

>> Risk Warning

If the domestic economic trend is lower than expected, it may cause the pressure on exchange rates and international balance of payments to heat up again; the effect of policy regulation may not meet expectations.