In the aftermath of the 2020 economic turmoil, the recovery process is proving to be a slow and arduous journey for the global economy, particularly in regions heavily reliant on monetary policyCentral banks are implementing strategies aimed at revitalizing their economies, and this often includes maintaining a prolonged period of monetary easingAnalysts suggest that interest rates are likely to remain at historically low levels until corporate and consumer financing needs return to more standard patternsThis is indicative of a broader hesitance within markets as they assess the long-term health of the economy.

On August 15, the People’s Bank of China (PBOC) made a notable adjustment by concurrently lowering the 7-day reverse repo rate and the Medium-term Lending Facility (MLF) rate by 10 basis pointsFollowing this, there were asymmetric decreases in the loan prime rates (LPR) for one to five years and beyond, which correspondingly pushed down government bond yields to unprecedented lows for the yearHowever, the market expressed significant profit-taking pressure and disagreements on forthcoming policy directions, highlighting the complexities in coordinating effective monetary policy.

Despite these adjustments, challenges remain apparent in the transmission of broad liquidity into credit expansionThe current economic growth momentum is notably subdued, indicating that the possibility of further rate cuts in the fourth quarter cannot be entirely dismissedWidespread concerns seem to overshadow any notion of an upcoming reversal in rate trendsOn the contrary, many economists perceive this low-interest environment as a necessary element in stimulating economic growth.

The central bank's persisting low-interest approach is further evidenced by its quantitative measures initiated since 2022. The PBOC enacted a 0.25 percentage point reduction in required reserve ratios

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Furthermore, by the end of July, the central bank had transferred approximately 1 trillion yuan in surplus profits to the treasury, which essentially reflects a nearly 0.5 percentage point thorough cut in deposit requirements across the boardSimultaneously, key policy rates such as the 7-day reverse repo rate and both the one-year and five-year LPR have seen notable reductions.

The landscape has created scenarios of 'asset scarcity', marked by a significant downward shift in market interest ratesThe extent and duration of available liquidity have surpassed market expectations, with prime rates dropping sharplyFor instance, the DR001 rate approached the historic low of 1%, while DR007 fell to a minimum of 1.29%. Notably, interbank certificate rates decreased by nearly 70 basis points—both figures represent record lows since May 2020. Nevertheless, stable growth policies have illustrated cautious pricing along the long end of the bond yield curve, resulting in an inclination for steeper yields.

The three asymmetric rate cuts since 2022 underscore a marked shift in policy sentiment towards the real estate sector, with the five-year LPR declining by 20 basis points more than the one-year equivalentThis narrowing of the spread, down to 65 basis points—the closest it has been to historical lows—has ramifications for mortgage lending as wellIn fact, the weighted average loan interest rate has dropped to a historical low of 4.41%, facilitated by this policy adjustment.

Looking ahead, discussion about potential further rate cuts arises particularly in the context of the real estate sector and the ongoing challenges presented by the pandemic as key macroeconomic variablesThe trajectory of these factors largely determines the slope of credit recovery, ultimately impacting whether additional stimulus measures, such as rate cuts, will be warranted to drive demand

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Real estate investments account for around 30% of GDP, and any decline in this sector flows through multiple channels affecting related industries, the banking system, household finances, and governmental budgets.

As repercussions from the pandemic continue to affect employment rates and consumer spending, the resilience of the housing market remains precariousData from July showed decreases in loans to both non-financial enterprises and households, with a drop in M2 and social financing growth rates revealing weakened financing demand from the real economyWhile the recent rate cuts have allowed first and second mortgage rates to descend to as low as 4.1% and 4.9%, respectively, transactional activity in major cities remains below a robust thresholdThis suggests a reduction in consumer responsiveness to lower mortgage rates, compounded by the fact that many existing loans are only set for repricing in January 2023.

On the flip side, the feasibility of additional rate cuts hinges crucially on adjustments to deposit ratesWithin the adjustments framework, banks reference benchmark rates driven by ten-year government bond yields and the one-year LPR to effectively recalibrate deposit interest ratesObservations indicate that the weighted average deposit rate was around 2.37% in late April, suggesting potential for a decrease following significant yield drops in recent monthsHowever, adjustments in deposit rates across commercial banks have yet to materialize appreciably.

In analyzing future interest rate trajectories, the PBOC’s latest measures did not immediately lead to further declines in funding rates despite substantial cutsEven if the central bank concluded additional reductions for the 7-day repo and the MLF, the impact on funding rates would likely remain mutedIt seems that the liquidity environment will persist, although evolving government strategies will aim to rectify demand shortfalls.

Historical patterns illustrate that compared to interest rates on 10-year government bonds, the social financing growth rate tends to lead by a couple of months, which raises critical awareness for investors watching for recovery signals in credit markets

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