On January 4, the People's Bank of China (PBoC) announced, comprehensive RRR cut, the first major monetary easing policy in 2019. The PBoC will cut the deposit reserve ratio of financial institutions by 1 percentage point. In 2018, the PBoC cut the deposit reserve ratio four times due to the U.S.-China trade disputes. At present, the deposit reserve ratio of large banks is 14.5%, and for the smaller financial institutions it is 12.5%. Unlike the previous policy of targeted RRR cuts, the PBoC has introduced a comprehensive RRR cut, which is expected to inject an additional RMB 1.5 trillion in liquidity into the banking system.
The monetary policy announced by the PBoC is part of the effort to promote China's economic growth, and it shows that the Chinese government is willing to further relax its policies to prevent the Chinese economy from slowing further and maintaining stable economic growth. Anbound's research team noticed that the market is beginning to worry if after the central bank begins to loosen monetary policy, will the liquidity released flow to enterprises? Or will it flow to the real estate sector again? If the funds are unable to reach the enterprise level and would not enter the market system, it may stimulate another round of asset bubbles.
Regarding this concern, Anbound's chief researcher Chan Kung believes that after the PBoC's RRR cut, it is necessary to keep the money in the enterprises and not making it a debt, which puts demands on the market vitality. The requirements of market vitality must be matched with policies, and financial measures (including operations such as interest rate cuts and RRR cuts) must be carried out on a large-scale and effective development plan. If this is done well, the market will be formed and the money will be retained in the enterprises, which in turn will increase social wealth. However, Chan Kung believes that at present, the Chinese policy support is still not at this level, and it is still in the operational stage of "financial walk". Segmentation still limits policy effectiveness; without clear and successful planning and system policy orientation, the negative effects of "major release" will be greater than the positive effects.
Regarding the possibility of real estate re-emergence, Chan Kung is of the opinion that objectively speaking, launching real estate is currently necessary for China, but it may not be benign. If the Chinese economy is to get better soon, it will require the real estate to drive the economy at the consumer end. However, real estate has caused a lot of problems and will cause even more issues in the future. What then, should China do? Chan Kung believes that this is not the question of how China sees things, but rather how it does things. Chan Kung suggested that the real estate should adopt the operation of controlling the price, letting the market to run on its own and regulating the scale; this means that China should gradually adjust the target through loosening the means, but not overly so. From the perspective of policy operation, there must be a roadmap policy operation, so that the market and asset holders would be well aware of the policy intentions, its possible rhythms and the market trends so that there will be clearer policy effects.
The real estate market has a great relationship with local governments; it also has a certain relationship with finance and interest rates. The dilemma in many cities also stems from the real estate market, especially the debt burden. For this, Chen Gong suggested that local governments should have a basic bottom line for their respective real estate markets. The experience of countries around the world can be used as a reference, based on the benchmark interest rate to build the growth prospects, which is far more effective than arbitrarily deciding the real estate market. There should be clearer reference standard for debt growth, asset prices, market transactions, debt size, and benchmark interest rates.
For instance, the real estate price's maximum growth space increase can be determined to be 10%. Compared with the current 4.35% loan benchmark interest rate (for the period of one year and within one year), the 10% increase is equivalent to 1.3 times higher than the current benchmark interest rate. Within this limit, it is sufficient to invigorate the economy and remain under control. After that, based on the direction of interest rate, the positive or negative adjustment factors can be linked to the interest rate. The government can make it clear in the roadmap that it will be strictly restricted and regulated to a certain extent; if the price increase exceeds the benchmark interest rate by 1 time, the restriction would have to be imposed; any increase below this would be considered normal. This is actually based on the benchmark interest rate, giving the market a guide to price regulation. All market participants, from investment to trading and asset holdings, will then be well aware of their actions and the possible consequences.
Chan Kung further explained that the market growth prospects based on a benchmark interest rate is an idea on the basis of "macro finance". The so-called "macro finance" perspective can be understood as an analysis and decision-making framework involving financial policies. Policies should be as transparent as possible, which requires linking to actionable policy tools. An interest rate is only a tool, and other tools or indexes can achieve the same effect. The key is that the regulation of real estate policy should be based on an operational, rather than on the "feeling" of the macro-sectors. The so-called "big finance" is not a financial issue, but a social problem and a political issue caused by finance. Therefore, "macro finance" is actually "political finance." In China's research on financial issues, it is quite necessary to focus on China's social development reality, not statistics or stereotypes.
Looking at the benchmark interest rate in terms of "macro finance", this is actually establishing a certain "anchor" relationship between the growth prospect of a certain market or the growth prospect of the macroeconomy and the basic interest rate as a benchmark for important financial markets. In our view, this association has the following meanings: (1) From the perspective of credit creation, it establishes a near-quantitative indicator for credit expansion in the economic development, which helps the central bank optimizing the effect of market regulation; (2) Providing a target for all market participants, as a reference for their market actions in order to make market participants anticipate the impact of market behavior; (3) Providing a relative marketization constraint mechanism for macroeconomic risks of the economic and market systems, which is consistent with the principle of "macro-prudential management" and the two can be mutually promoted.
The benchmark interest rate adjustment itself is not a new concept or a new tool. However, it is a new policy idea to link the benchmark interest rate with the growth of the real estate market and choose timing and perspective. Referring more to the benchmark interest rate to formulate policy objectives and guide the market will help the policy department to form a policy roadmap. With this mechanism, it will be unnecessary to decide the monetary policy based on the "attention" of the leaders, and the relevant authorities will have no need to explain to the market. Why was the macro-control in the past could be commenced and suddenly stopped? The key to institutional design lies in the linkage; because interest rates are closely related to debt, designing a real estate control policy linked to interest rates can control debt and increase the transparency of the real estate market. The relationship between debt and real estate can become clear through this way, hence creating conditions for controlling debt. In addition, the establishment of a benchmark interest rate mechanism will also help to strengthen the central bank's "independence" under the existing system and make monetary policy more effective.
Final analysis conclusion:
If the real interest rate standard is established, it will help to enhance the effect of economic regulation, as well as improve the rationality of the market. Interest rates are not new tools, but they have not been the mainstay of policy in the past. The current downward pressure on the economy has increased, and the situation in China and abroad is complicated. This background provides a policy opportunity and a strategic window; the Chinese policy department should indeed seriously study and introduce such a mechanism.
