China Cuts Rates Again, US Keeps High Dollar Interest Rates

China's interest rate cut this time is faced with a very complex domestic and international situation. The most critical question is, why didn't we wait for the United States this time?

Previously, there was a view that both China and the United States were gritting their teeth and enduring, to see who would be the first to give in and fall. Why are we not afraid this time?

Everyone knows about the interest rate cut news. On February 20th, the People's Bank of China authorized the National Interbank Offered Rate to announce the current loan market quote rate. The 1-year LPR remained unchanged, and the LPR for more than 5 years was reduced by 25 basis points, creating the largest decline in history.

This interest rate cut is indeed very rare and does not conform to the People's Bank of China's prudent style in the past, so it has caused a great shock to the market.

We say that the domestic and international situation is very complex, mainly referring to the fact that the US dollar and most developed countries around the world are still in an interest rate hike cycle, and our financial system is facing relatively large pressure.

Some people say it's a financial war, to be precise, it's a matter of international speculators and Jewish capital. Smashing the market and bottom-fishing are things they often do.

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Historically, the US dollar has gone through six interest rate hikes and cuts, which have made many countries still fearful. Some people say "interest rate hikes are like climbing stairs, and interest rate cuts are like taking an elevator," meaning that Americans are very cunning. They raise interest rates to burst global assets and financial systems, and then quickly cut interest rates to harvest.

These things objectively exist, so this time everyone is really scared and has strengthened their prevention.

So, some people say "China and the United States are both gritting their teeth and enduring, to see who will be the first to give in and fall." What is the reason for this?

The most fundamental logic here, simply speaking, if the US dollar has not yet cut interest rates, and we cut interest rates first, it will further widen the interest rate gap between China and the United States. On the one hand, this will accelerate the speed of capital outflow, and on the other hand, the widening interest rate gap will give international speculators the space for arbitrage.At the same time, high interest rates in the US dollar and the easing of the Chinese yuan could very likely lead to a faster depreciation of the yuan, which is very detrimental to our international economic and trade cooperation. For example, what would happen if we swapped yuan with the EU and the yuan rapidly depreciated?

Of course, it's not that the yuan cannot depreciate. The main point is that for the macroeconomy, exchange rate stability is very important, and rapid increases or decreases are both unfavorable.

So, why this time are we not waiting for the US? Why are we not afraid? We believe there are mainly two reasons.

The first aspect is that the current reduction of the LPR rate for terms over five years is an actual need for China's economic development.

This is to support the real economy, especially the manufacturing industry. Because currently, our corporate leverage ratio is very high, exceeding 168%. This is equivalent to China not having just one Evergrande, but many Evergrandes. Even if they do not default, they cannot move.

The excessively high leverage ratio directly leads to a heavy interest burden on enterprises. We have seen some people even suggest whether it is possible to suspend interest payments, which is also unrealistic. However, reducing interest rates to lighten the burden on enterprises is timely.

The number of corporate medium and long-term loans is very high, and the funds released by the interest rate reduction, as well as the momentum it brings, are very significant.

The second aspect, of course, is also understood by many people, which is to further stabilize the real estate market.

This time, the targeted reduction of the LPR rate for terms over five years is also for medium and long-term loans. The largest part of these loans is corporate and institutional loans, followed by mortgages.

Many people think that mortgages are the main force of the LPR for terms over five years, but in fact, the scale of corporate medium and long-term loans is much larger than that of mortgages, and it also has a heavier weight for the overall economy.Thus, this interest rate cut objectively benefits the real estate sector, but it is not specifically targeted at real estate. The primary goal is still for the overall economy.

We can even interpret this as a targeted interest rate cut specifically for LPR above 5 years, with a relatively large margin, which is actually a directional cut aimed at the real economy (especially manufacturing) and real estate.

Since it is a targeted release of liquidity, there can be many regulatory methods, so there is no need to worry about not being able to control the direction and speed of the water flow. On the other hand, the 1-year LPR did not decrease this time, and the pressure on commercial banks' loan interest rates to decrease remains not very high.

For these two reasons, we don't have to worry about the capital outflow and short-term arbitrage issues brought about by the interest rate differential between China and the United States.

Last year, we said that we have many ways to avoid the impact of the US dollar's interest rate hikes and cuts, among which targeted interest rate cuts are a very good tool.

At the end of last year's important economic work conference, it was repeatedly emphasized that the monetary policy for 2024 should be "flexible and moderate, precise and effective." Is this very precise?