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Nomura On China LPR, MLF and 7D RR

CHINA
  • Why the 1yr LPR was left unchanged; the impact of the cut on banks
    • The NIFC left the 1yr LPR unchanged perhaps because it wanted to protect bank net interest margins, as banks are under pressure from rising NPLs.
    • The 15bp cut to the 5yr LPR will only impact mortgages of outstanding loans from 1 January 2023.
    • As of end March, total outstanding mortgage loans were at RMB38.8trn out of a total of RMB201.0trn for all outstanding bank loans.
    • Nomura estimates an accumulated 20bp cut in the 5yr LPR would lower banks’ earnings by RMB77.8bn.
  • Why not cut 7-day reverse repo or MLF rate?
    • Nomura would not view cutting the MLF as very relevant, given there is very little funding from MLF, at only RMB400bn so far this year.
    • Cutting the MLF would be much more relevant if the LPR were closely linked to the MLF rate, but since Beijing can cut the LPR rate without lowering the MLF rate, the importance of the MLF rate drops.
    • On the other hand, with DR007 at only ~1.65%, which is far below the 2.1% PBoC 7-day reverse repo rate, there is really no need to cut the reverse repo rate at all.
    • Banks are flush with liquidity; the real problem is a lack of quality credit demand.
    • Cutting the LPR is the right policy choice at the moment, in Nomura view, even though its impact is limited by lockdowns.
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  • Why the 1yr LPR was left unchanged; the impact of the cut on banks
    • The NIFC left the 1yr LPR unchanged perhaps because it wanted to protect bank net interest margins, as banks are under pressure from rising NPLs.
    • The 15bp cut to the 5yr LPR will only impact mortgages of outstanding loans from 1 January 2023.
    • As of end March, total outstanding mortgage loans were at RMB38.8trn out of a total of RMB201.0trn for all outstanding bank loans.
    • Nomura estimates an accumulated 20bp cut in the 5yr LPR would lower banks’ earnings by RMB77.8bn.
  • Why not cut 7-day reverse repo or MLF rate?
    • Nomura would not view cutting the MLF as very relevant, given there is very little funding from MLF, at only RMB400bn so far this year.
    • Cutting the MLF would be much more relevant if the LPR were closely linked to the MLF rate, but since Beijing can cut the LPR rate without lowering the MLF rate, the importance of the MLF rate drops.
    • On the other hand, with DR007 at only ~1.65%, which is far below the 2.1% PBoC 7-day reverse repo rate, there is really no need to cut the reverse repo rate at all.
    • Banks are flush with liquidity; the real problem is a lack of quality credit demand.
    • Cutting the LPR is the right policy choice at the moment, in Nomura view, even though its impact is limited by lockdowns.